COVID-19, Economic Cost and the Role of Fiscal Policy

According to our calculations, the COVID-19 pandemic caused Norwegian mainland GDP in 2020 to fall by NOK 145 billion, or 4,7 per cent, compared with a scenario without the virus. The discounted loss for the period 2020–2023 as a whole is projected to be NOK 330 billion, equivalent to 11 per cent of annual mainland GDP. The projection is highly uncertain. As the pandemic has completely dominated the global economy since mid-March of 2020, we have with few exceptions assumed that deviations from the projection published in December 2019 are attributable to the coronavirus.

There is unusually great uncertainty surrounding economic developments in 2021 and going forward. Our projection is based on the assumption that effective vaccines will lead to the impact of the pandemic abating through the first half of 2021, and to the economy normalising in the autumn. The repercussions of the coronavirus will nevertheless continue to linger on. Although there are effective vaccines, there is uncertainty regarding access to them and their efficacy in preventing transmission of infection. There is also uncertainty associated with mutated viruses, how they will spread, whether the vaccines will be efficacious against them, and what sort of mutations may arise in the future.

Although public finances were hard hit by the pandemic, it now appears that both tax revenue and spending will be somewhat less impacted through 2021 than forecast by the Norwegian government. Our estimate for pandemic-related costs in the 2020 fiscal budget is high nonetheless, at NOK 178 billion.

Calculations of the impact arrived at by means of the KVARTS model indicate that in 2020 fiscal policy mitigated the fall in GDP to some extent. Discretionary measures in the form of extra support schemes for individuals, businesses and the non-profit sector, coupled with increased government grants, are estimated to have reduced the fall in mainland GDP by 0.5 percentage points. The estimate is subject to strict assumptions, and may conceivably underestimate the impact somewhat. In addition comes the effect of the petroleum tax package, by far the government’s most costly measure in 2020, which is estimated on somewhat uncertain grounds to be 0.2 per cent.

Economic policy in 2020 has been largely motivated by the goal of reducing the loss of income for those affected and preventing long-term negative effects on the economy. The policy has involved redistribution of losses from the private to the public sector. Saving has increased sharply in the private sector, mainly as a result of lower tax payments, increased transfers and lower consumption. But this does not necessarily mean that public transfers have largely been saved. We must assume that support to persons who have experienced a severe loss of income as a result of furloughing and unemployment has to a significant extent been spent on consumption, and likewise support for the self-employed. Support for businesses will to some extent have gone to maintaining operations, but to a greater extent to reducing losses. This will have led to increased “saving” by enterprises. At the same time, there is great inequality within the private sector. Some operators that have been directly impacted will still have suffered losses, even after compensation from the state, while others may have benefited financially, for example through reduced employer’s social security contributions. On balance, enterprise earnings fell markedly from 2019 to 2020.

That the value of the Government Petroleum Fund Global increased by over NOK 800 billion in 2020, despite substantial withdrawals, is largely due to capital gains. These gains are probably attributable mainly to lower market rates and lower required rates of return, and not to improved prospects of future cash flows. In isolation, this means that we must expect a lower percentage return on the Fund in the future than we did before the pandemic. For a long-term investor like Norway, the future return and cash flow from the Fund is more relevant than its market value.