Efficiency or equality? Freedom, competition and consumer sovereignty? Nationalisation and high government expenditure? These are questions often posed to many economists and economies in the world. With government spending at about 38.3% of the GDP in the UK and 35.1% in the USA, what makes Norway, The Land of the Midnight Sun’s economy, such a success? Do they offer the perfect example of a mixed economy done right whilst having government spending at 48% of their GDP? This ultimately begs the question: what can we learn from them?

We all know Norway from its Viking past and incredibly long sunshine in the summer, but beyond that, they are one of the biggest economic powerhouses in the world: one of the biggest GDP per capita globally, $76,822 on the Purchasing Power Parity Index and an annual trade surplus for the most part since 1989. It’s unsurprising their long term unemployment rate between 1995 and 2020 is 0.72%. Things certainly look bright for the Nordics. However, Norway were not always this machine of an economy.

So what happened to the modest fishing nation the world has come to revere? When the Norwegians were unpretentiously exporting fish from the North Sea they had a real GDP similar to developing countries like Bangladesh. 1969: that’s when it all changed.

A lot of oil was discovered in the Norwegian sea, assimilating to about 1.6 million barrels per day and more than anywhere else in the world. GDP increased by almost 5 times in the 1970s. The Norwegian government decided to generate its own money from the oil reserves with the state-owned Statoil (now known as Equinor) and not through private companies. It goes without saying, the Scandinavian state became very rich quick.

However, unlike others in their position, they stored their money in a Sovereign Wealth Fund (state-owned investment fund), with all profits from the investment only available to spend on public and merit goods, as well as reinvestment into the fund. It is the biggest of its kind in the world with assets worth about $1.18 trillion, which has given Norway stability like no other.

But are things as perfect as they seem? Norway has high costs of living, just like their Scandinavian counterparts . The Big Mac Index shows us that the Norwegian Krone is 7.5% overvalued against the US dollar. This will make exports less competitive particularly in the international market.

This problem is also close to home; domestic businesses struggle with consumers demand driven towards imports from abroad. This is seen on Norway’s EU border with Sweden where natives can very easily buy goods from Sweden at a lower price without being stopped, damaging the domestic market. No one can blame them, even a loaf of bread costs 110.7% more in Norway than in the UK.

This is accompanied by aggregate demand stalling for oil and gas, due to the increase in renewable energy, fuel efficiencies and the move towards electric vehicles. The Nordics have to adapt in the long run. Current estimates predict Norway has 50 years more of oil and their heavy specialisation in this sector could engender structural unemployment in the future.

However there are positives with the strength of the Krone. Norway’s overvalued currency helps when investing abroad and overall, more imports can be bought. Lots of iron, steel and electrical machinery have been imported to Norway in recent time at lower prices.

Is the economic plan of Norway worthwhile then? Norway have had Government budget surpluses for years, apart from an unprecedented setback in 2020 due to the conditions of the world economy. To put that into context, the UK and US have had annual deficit for the best part of 2 decades. Norway is how some may therefore describe economic stability.

This could be down to their incredible ability to do business. The 2020 World Bank Report put Norway up there as the 9th easiest nation do business with. It’s no wonder they possess strong trade agreements, like the free trade deal with the UK, and other strong relations with the EU.

However, Norway’s incredibly high costs of living can have adverse effects on their economy. High prices and a particular high ad valorem, consumption tax known as MVA (UK VAT equivalent) at 25%, can cause consumer demand to fall for many normal goods. This damages domestic businesses; show by when more Norwegians are seen to have bought more meat and alcohol across the border in Sweden; but it also damages the overall efficiency of the economy.

Moreover, Norway have national debt and it is worth a substantial 40.6% of their GDP. This is as a result of borrowing, spending on imports, as well as bonds to repay these debts which take a long time to mature. This can be seen as a problem as it can affect competition and spending habits of the Norwegian government.

Yet Norway have tried to tackle this with high taxes. In fact, they have some of the highest tax rates in Europe with taxes on income up 50%. This helps with the government’s continued high expenditure and maintains an annual budget surplus, alongside helping to sustain economic equality.

Should the UK do the same? Increasing taxes is often something government are scared to do and Thatcher certainly wouldn’t approve. It disrupts economic efficiency and the incentive within the free market. Most of all, government don’t want to be seen as unpopular and potentially damage future election campaigns . On the flip side, with our large national debt, this could be an option: to reduce this socio-economic divide but also to not enter another period of spending cuts. These cuts would halt growth, which is needed in creating future earnings to pay the debts off.

Despite these budget surpluses in Norway, growth is beginning to stall. This could be down to the high debt to income ratio of Norwegians. Norway’s household’s debt rose to 110% of GDP in 2020. This is believed to be tightly linked to a boom in the housing  market. While the rest of Europe saw a fall in house prices in 2008, Norway’s started to increase a rapid pace. 80% of lending to households is for mortgages and with 70% of Nordic’s owning a house, this figure is dangerously high and can have a large effect on the economy as a whole. This causes a reduction in consumption in the economy as more disposable income is used to help with these repayments.

On top of this,  the consumer confidence indicator, which declined to -11.5 in the final quarter of 2020, is a key cause of lower marginal propensity. Nordic’s aren’t confident in short, medium and long term economic prospects. This could again stall growth and harm domestic markets.

Yet we shouldn’t dismiss the Norwegian economic model. Even in the midst of an economic recession, what lessons can the UK learn from Norway? Despite the two nations being poles apart in terms of economic stability, their current account and population size are indeed comparable. The UK have large national debt like Norway too (despite Norway having a national debt to GDP of 40.6%, compared to the UK’s which is over 100%). They are both forward thinking economies who rely very heavily on international trade. Much like the UK now, Norway are not a member of the European Union. Norway’s two referendums in 1972 and 1994 both were declined; many voters voted ‘no’ due to the importance of sovereignty to the Nordics.

Equality is also important for Norwegians. The OECD Better Life Index tells us that Norway’s top 20% of the population earn four times more than the bottom 20%. This may still seem like a divide but this is above the UK where the top 20% earn 6 times more. Maybe there is a leaf to be taken from Norway’s book: Could this be due to the Norwegian’s easier ability to find work? Could it be Norway’s excellent educational system, boosted significantly by the profits of the Sovereign Wealth Fund? Or potentially even to do with the value of wages themselves? After all, could this smaller divide between the very top and bottom of society be the incentive required for workers to go into particular sectors with low supply for labour, particularly in the public sector?

Additionally, Norway only has 3% of employees working long hours (over 50 hours per week) compared to the UK where the figure sits at 13%. This stems from the many laws to protect workers: none more so than the Norwegian Employment Law. Could all these factors be a reason for why Norwegians have a higher quality of life? A life expectancy of 83 years (3 years above the OECD average) and a happiness grade of 7.6, much higher than the OECD average of 6.5, should certainly be strived for in the UK.

The UK can also learn lessons from Norway with regard to implementation of renewable energy. Over 98% of electricity production in Norway is from hydropower plants, being the largest producer of hydropower in Europe as well as a key producer of wind energy. In Norway, the goal to ban sales of diesel and petrol cars is set for 2025. In contrast, the UK have now aimed to do this by 2030 as part of a package of green initiatives put forward by Boris Johnson in February 2020. With year to year electric cars sales being at 5.4%, we seem a long way off. Norway meanwhile saw electric cars take up a market share of 54.3% in 2020, making their 2025 goal very achievable. The Norwegian government has a clear vision of what it wants to achieve with a series of tax incentives to stimulate vehicle adoption take-up. Should the UK do the same?

Many think the UK should follow Norway’s lead in terms of their green innovations. The House of Common’s 2010 Environment Audit told us that there are 35,000 premature deaths due to air pollution in the UK, where the level of atmospheric pressure, PM2.5, is at 11.3 micrograms per cubic meter compared to Norway’s 4.6. However, we must bear in mind the UK population is about 12 times that of Norway. Yet the truth of the matter is; we have put green plans in place but we still have a long way to go, particularly after the great industrialisation in the past century. Looking to Norway may be useful for planning our greener futures.

I am not suggesting the Chancellor of the Exchequer should follow Norway’s example and fiscal policies by word; the UK has a much larger and more complex economy and quite frankly, the UK has not been as fortunate as Norway whose oil discovery changed their fortunes in 1970s. Yet, the UK head into 2021, seeing the worst economic recession since records began: 5% of the workforce unemployed, a significant national debt up to £2.13 trillion, and vast borrowing during the pandemic, including £34.1 billion in December 2020 to cover expenditure. Some major policies need to be implemented.

As we look forward to the future, should we adopt a more equitable economy and society? Should we invest more into tackling problems like climate change and unemployment? And aim to drive up living standards and GDP per head PPP, which as seen in Norway can stimulate growth? Or is this large government expenditure a hindrance on innovation and competition?

This ultimately depends on what the UK citizens want. We know that post WW2, voters wanted change and opted for a Labour government. We saw the birth of the welfare state in 1948. Will the UK follow this path again in 2024? Perhaps the more pertinent question is this however: Can the UK realistically introduce such measures?

In short, yes, but not without difficulty. The UK hasn’t been as fortunate with oil discovery and are not on the same scale as Norway, being the 6th largest economy in the world. You could say an oil rich nation like the UAE should look at Norway, but they have gone down a different path, full of public spending sprees. Nonetheless, this by no means suggests that the UK can’t look for inspiration from Norway. With their forward thinking approach and eco-friendly, accessible economy for all, you can’t help but be inspired.

Jonny Philp