Cushion: the margin under Norway's spending ceiling

On 12 August the Norwegian Government Pension Fund Global reported a half-year return of 9.4 per cent, 1,753bn kroner, its highest ever half-year kroner return[1]. The same report puts the fund's expected annual fluctuation at 11.1 per cent, about 2,500bn kroner. The cushion between spending and the ceiling no longer covers one ordinary year of movement in the fund.

The handlingsregel is a guideline that governs how spending over time follows the expected real return on the Government Pension Fund Global. From 2001, the expected real return was estimated at four per cent. From 2018 onwards the estimate was three per cent[2]. Spending from the fund made up 579.4bn kroner in 2026; that is 26.8 per cent of central government non-oil budget expenditure[3]. The actual transfer from the fund in 2026 is 452.2bn kroner. The rule is assessed against the structural deficit, 579.4bn, which corrects for cyclical swings and accounting effects. According to the ministry, fiscal policy is more vulnerable to abrupt and persistent declines in the value of the fund than previously[3].

Technology holdings went from 20.3 to 23.3 per cent of the fund's total value in the six months to June, and Taiwan's share of equity investments rose from 2.7 to 3.9 per cent[1][4]. The management mandate limits expected relative volatility, the expected deviation from the benchmark index set by the ministry, to 1.25 percentage points. Expected relative volatility was 33 basis points at the end of June, down from 37 at year-end, and far from the ceiling of 125 basis points[1]. The fund follows an index that has become more concentrated. The index's exposure is the fund's.

In order to avoid large spending cuts or tax increases following fund losses, spending has been set below three per cent of fund value. By the ministry's estimate, that is 2.7 per cent in normal times[3]. Net provision to the fund, the amount added by the government, has fallen from 355.7bn kroner in 2024 to 176 in 2025 to 69.1 in 2026, a fall of 81 per cent in two years. Net cash flow from petroleum dropped from 702.2bn kroner to 521.3 over the same period while the non-oil deficit grew from 331.7bn kroner to 452.2[3]. How far the fund can fall, the cushion, has decreased by almost 40 per cent from 15.5 per cent in 2024 to 9.5 in 2026, measured against the fund's value at the start of 2026, with spending held flat[4]. NBIM expects the fund to fluctuate 11.1 per cent annually. According to them "in two out of three years, the portfolio's return is expected to fall within the negative and positive value of the metric"[1]. In about one in three years the cushion is exhausted. A smoothing clause then holds spending above three per cent of a fund that has already fallen[3]. Stability in the budget is bought from the fund's capital.

The measure of whether spending is inside the guideline is the structural deficit expressed as a percentage of fund value at the start of the year. This ratio is reported in every budget document. Spending of 579.4bn kroner in 2026 against an assumed fund value of 20,500bn is 2.83 per cent[3][4]. NB 2026 printed 2.8. The realised fund value was 21,268bn kroner. Spending did not change. The same 579.4bn became 2.72 per cent[1][4]. RNB 2026 printed 2.7[2]. The structural deficit for 2025 was estimated by the ministry at 492.3bn, then revised to 542.4, then to 534.2, then to 525.8 as the year progressed[5]. The share of fund capital printed 2.7 at every one. Fifty billion of movement produced no movement in the reported ratio. The 2026 ratio was based on the fund's value in late July, projected forward[3]. The 2026 budget records that the fund ran above 20,000bn in February 2025, fell below 18,000bn in April, and rose again over the summer. That is a movement of 2,000bn inside the year in which the following year's ceiling was being set. The ratio has been stable over the last few years; that is not because nothing changed. It has been stable because the denominator is re-estimated as the market moves.

Fund withdrawal has been between 2.4 and 2.9 per cent in every year since 2018 except 2020 and 2021[2]. The guideline has not been breached. The 2025 budget considers this uncertainty directly. It identifies declining petroleum cash flow as a driver of the probability that spending exceeds the expected real return after 8, 12 and 16 years, holding the withdrawal constant as a share of mainland GDP[6]. That analysis is long-term. The cushion is measured yearly, and it does not survive one year in three. Net provision has fallen 81 per cent, and that is in the current budget.

The 2027 National Budget is presented in mid-October. If the withdrawal is set materially further below three per cent, the cushion is being rebuilt. If the cushion is below 11.1 per cent again, it is thinner than one normal year for the third consecutive budget. Then the safeguard has stopped doing what it is supposed to do, and the adjustment shifts onto the fund. The cushion was built for a fund that could fall. It has been thinned by a fund that rose.

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Notes

[1] Norges Bank Investment Management, "Half-year report 2026," 12 August 2026.

[2] Finansdepartementet, "Oljeinntektene og bruken av dem," 15 June 2026.

[3] Finansdepartementet, "Meld. St. 1 (2025–2026) Nasjonalbudsjettet 2026," chapter 3, 22 October 2025.

[4] Own calculation from Norges Bank Investment Management and Ministry of Finance figures. The cushion is the fall in fund value the year's structural non-oil deficit can absorb before the following year's ceiling of three per cent of fund value falls below it. Assumes spending held flat in nominal kroner and net provision to the fund at the budget estimate. The 2026 figure is measured against the realised fund value of 21,268bn kroner rather than the assumed 20,500bn.

[5] Finansdepartementet, "Prop. 26 S (2025–2026) Ny saldering av statsbudsjettet 2025," Table 1.1, 28 November 2025.

[6] Finansdepartementet, "Meld. St. 1 (2024–2025) Nasjonalbudsjettet 2025," chapter 3, Box 3.3, 7 October 2024.

Image credit: Einar Storsul, Unsplash

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Continental is a biweekly column on European economics by Felix Schmidt. New issues appear on Substack first and on the International Economics Post within 48 hours.