Norway’s growing defense spending will be the primary driver of projected budget shortfalls in the coming years, even exceeding the impact of population aging, Bloomberg reports, citing the country’s Finance Ministry.
In a white paper outlining the nation’s long-term economic outlook, the ministry in Oslo stated that increased defense outlays are expected to reach a level comparable to the combined spending on national insurance, healthcare, and education services by 2036. While the costs associated with population aging will be “moderate” in the short term, they will become more substantial beyond the 2030s.
“A new security policy situation requires us to use more of society’s resources on defense and preparedness in the years ahead,” the ministry emphasized.
For decades, Norway’s oil and gas reserves have fueled its public finances, allowing the country to amass a $1.7 trillion sovereign wealth fund. While a budget rule dictates that spending from the fund should remain at 3% of its anticipated real return annually, these injections have increased alongside the growth of the fund itself.
As a result, Norway’s oil-adjusted structural budget deficit has expanded from 4.9% of mainland GDP in 2010 to nearly 10% of GDP last year. This year, the deficit is projected to reach 10.3%. Transfers from the fund have covered over 20% of budget spending since the pandemic, partly due to windfall gains following sanctions against Russia.
Despite projections of “higher than previously estimated” cash flow from the fund, enabling increased fund utilization for a few years, the ministry anticipates a decline in future transfers. Simultaneously, population aging will necessitate increased welfare spending.
Public spending is estimated to increase by 5.7% of mainland GDP by 2060, slightly higher than the 5.6% forecast in a similar document by the previous government in 2021.
Norway’s parliament approved a plan in June to nearly double defense spending over the next 12 years to address threats from neighboring Russia, focusing on naval and air defense capabilities. The NATO member aims to reach its defense spending target of 2% of GDP by 2024 and achieve a level of 2.7% of GDP by 2030.
