The Nordic nations have much less adversarial political cultures than Australia, and this brings major long-term policy benefits.
This lesser adversarialism exists in part because, in Norway, like Sweden — but unlike the Australian Parliament and most parliaments in the world — seating is arranged according to the geographic constituencies which the members of parliament represent, not according to their party affiliation. Thus, parliamentarians from the same regions, but from different political parties, sit next to each other in the legislative chamber in Norway and Sweden.
This arrangement reduces the tendency for all members of one political party to just congregate together and barrack, in a mindless way, against their opponents. It therefore makes it less likely for politicians to artificially exaggerate differences with opponents for short-term advantage. The parliamentary seating arrangement, instead, encourages discovery of areas where there might be agreement.
The persistence of influence by independent public service personnel has also entrenched certain long-term policies in the Nordic nation which have been much more controversial in party-political terms in Australia. An important example of this is Norway’s management of its natural resources compared to Australia.
Norway’s Labour Party when elected to government in the early 1970s, with support from public servants, established substantial taxation of the international oil companies which came to drill in Norway’s new North Sea oilfields. It also successfully created Statoil, a national, publicly owned oil company which took a 50% ownership share of all new oilfields. Cross-party support ensured the continuation of these policies by later governments, led by different political parties, which soon followed.
Indeed, in 1972, Norway’s Parliament unanimously adopted a set of basic principles for the development of oil. These principles included that national supervision and control must be ensured for all operations on the NCS (Norwegian Continental Shelf) and that “petroleum discoveries must be exploited in a way which makes Norway as independent as possible of others for its supplies of crude oil”. In a far-sighted declaration, the Parliament also declared that “the development of an oil industry must take necessary account of … the protection of nature and the environment”.
[pullquote] “The agreed cross-party approach to developing resources in Norway contrasted starkly with the polarised party politics of Australia in the 1970s.” [/pullquote]
The agreed cross-party approach to developing resources in Norway contrasted starkly with the polarised party politics of Australia in the 1970s. Norway’s initial royalty-based tax arrangements for resources were adjusted in 1974 to ensure that they kept up with the actual extent of profit being made from resource extraction. In Australia, by contrast, resources continued to be taxed in a way that was fragmented, very complex and varied widely between the states and territories.
These tax arrangements were inefficient, and they were not equipped to keep up with — and hence they only captured a comparatively very small fraction of — growth in private mining company profits, as the Henry Tax Review graphically revealed in 2009.
When resource taxes were increased in Norway in 1974, large private oil companies protested angrily but, as one book explained, “the Norwegian Ministry of Finance … did not let itself be scared off. Its underlying understanding was … [that] the state had to aim for the greatest possible share of the economic” benefit from large oilfields “to go to the community”. Further, the ministry correctly judged that “as long as the oil companies secured profits which corresponded to, or were higher than, those in other industries”, then they would continue their operations.
In 1990, in recognition of the greatly increased size of the oil industry, and its particularly large proportional importance for Norway’s economy, the Norwegian government took new action to regulate revenues from oil so that that they would not be spent irresponsibly. The government formed the Petroleum Fund, into which money began to be deposited in 1996. In 2006 this became the Government Pension Fund – Global (Statens Pensjonsfond). It is commonly referred to by Norwegians as the Oljefondet (oil fund), while it is often referred to in other parts of the world as Norway’s “sovereign wealth fund”.
The fund is fully owned by the Norwegian state through the Ministry of Finance. It is managed by Norway’s central bank (Norges Bank). It has grown to be worth more than 5000 billion Norwegian kroner — some $800 billion. The fund takes in all the considerable revenues which the government receives from Norway’s oil and gas, including taxes, ownership shares and dividends from Statoil. It then invests these outside Norway, in order to prevent adverse effects from those revenues on the nation’s currency exchange rate and therefore on the Norwegian economy.
Protecting wealth, separating revenue
One of the papers prepared for the Henry Tax Review identified how, in Norway, “the Government Pension Fund – Global is used to invest revenue from mining with two main stated aims”. The first is “to ensure petroleum revenues are available for use by future generations as well as current generations” so as “to provide the government with savings on which to draw in periods where public disbursements are too large to be financed by tax”. The second is to separate “current petroleum revenues” from “the use of these revenues in the economy” in order “to shield the economy from fluctuations in prices and extraction rates in the petroleum sector”.
This second aim is in line with the principle, well-established among economists, that nations with substantial natural resources need to manage these in a way which prevents the nation’s currency from rising to the extent of disadvantaging other sectors of the national economy.
In Norway, as the Australian authors of the Henry Tax Review working paper also noted, the use of the sovereign wealth fund:
“… is limited to 4%, or the expected annual real return on the … fund over time … This rule is to ensure use of the revenues can be sustained over time. The government sees that the fund is not savings but represents the conversion of petroleum wealth to financial investments.”
A proportion of those investments can then be used by the national government each year. Accordingly, Norwegian governments receive the benefit of up to 4% of — or the expected annual real return on — the Government Pension Fund’s investments, each year, for their budgeting. At the same time, the fund stays overwhelmingly intact and growing for the future.
Since leaving his position as Treasury secretary, Ken Henry has continued to make clear statements about the need to increase taxation in Australia. He has said that both major political parties in Australia need to face up to the fact that they cannot deliver new services, and a budget surplus, without any increased taxes. If they do not face up to this reality, he says, then governments will have to keep cutting spending as a “permanent process”. Australia instead needs to “improve the tax system so it’s capable of producing more revenue with minimal economic damage”, he says; and, as part of that, it will still “need to find ways to apply higher rates of tax to natural resources including mineral resources”.
Henry points out how the national government’s revenue fell from 26% of GDP in 2001 to just 23% of GDP in 2013. He has said that:
“I certainly did not anticipate that today [national government] revenue would be 3 percentage points of gross domestic product below where it was a little more than a decade ago.”
Indeed, he describes it as “incredible” that revenue could be that low given “the fact that Australia has had such a strong resources boom” in that time. Over the same period, national government expenditure as a proportion of GDP fell from 25% to 24%. It is “because revenue has fallen by 3 percentage points of GDP and spending has fallen by only 1%” that the national budget went from surplus to deficit, Dr Henry says.
The implication of this is clearly that governments should stop focusing on cutting government spending and start focusing on fair ways to increase government revenue. Dr Henry also says that:
“If you ask me the question do we have the capacity to finance new spending without new sources of revenue, the answer is no.”
If Australians are to receive more services, benefits and programs than they currently do, then the necessary revenue will need to be raised. We need now to heed Ken Henry’s words, and we need to study again Norway’s successful approaches if Australia is to improve our own governance and long-term policy outcomes.
This is an edited extract from Andrew Scott’s new book Northern Lights: The Positive Policy Example of Sweden, Finland, Denmark and Norway, published by Monash University Publishing and available from today.