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UPDATE 3-Norway ups 2010 oil fund spending, rate hike seen

Published 10/13/2009, 08:44 AM
Updated 10/13/2009, 08:51 AM

* 2010 oil spending raised by 14.6 bln crowns to 148.5 bln

* Government says budget "slightly expansive"

* Ups 2010 growth fcast to 2.1 percent from 0.75 percent in May

* Economists say budget may push up rates, crown firms

* Finmin says rate level at 1.25 percent reflects crisis

(Adds opposition reaction, finmin comments, updates crown)

By Aasa Christine Stoltz and Joachim Dagenborg

OSLO, Oct 13 (Reuters) - Norway's government unveiled a "slightly expansive" 2010 budget that aims to spend more oil wealth next year compared to 2009, adding pressure on the central bank to raise rates quickly, analysts said.

The budget presented by the centre-left coalition government -- which won re-election in September for another four-year term on pledges to maintain its economic course -- was structured to help the economy regain speed after a mild recession.

The budget showed the structural deficit, a measure of how expansive the budget is, would increase by about half a percentage point in 2010.

The Labour-led government said the budget should be seen as "slightly expansive" for the economy in order to offset the fact that unemployment was still expected to rise.

To avoid overheating, Norway invests all of its oil and gas revenues in an offshore fund. In normal years, it spends 4 percent of the fund's value but has spent more in 2009 to avoid the worst of the global downturn.

Economists said the budget gave a bigger stimulus to the economy than most experts and Norges Bank had expected, pointing to the need for interest rates to climb quickly from a record-low 1.25 percent.

"Seen in isolation, this supports higher interest rates," First Securities economist Bjoern Roger Wilhelmsen said.

"The budget will, together with consumption and housing prices, be an argument for increasing interest rates more rapidly," said Frank Jullum, chief economist at Fokus Bank.

"DANGEROUSLY STRONG CROWN"

The opposition and Norwegian industry groups lashed out at the plan, saying it would drive up rates and strengthen the crown to levels which could hurt Norwegian export industry.

"The government is spending too many oil billions ... making the crown dangerously strong," said John Bernander, head of the Confederation of Norwegian Enterprises NHO.

The crown, which has strengthened 18 percent since December last year, appreciated on the news to 8.30 to the euro from 8.33 in afternoon trade on Monday, before easing slightly.

Oil-rich Norway has lived through only a mild downturn during the global crisis, helped by a large fiscal stimulus to keep activity up, unemployment low and driven down interest rates 4.5 percentage points from a year ago.

Norges Bank has signalled rates will soon rise again as the economy regains steam, and most economists expect it to be among the first central banks to raise rates this month.

"An interest rate at 1.25 percent means that the economy is in a crisis, a normal level is between 5 and 6 percent," Finance Minister Kristin Halvorsen told a news conference.

The finance minister said the budget had been made "slightly expansionary" because growth next year was expected to be lower than trend despite an improving economic outlook.

The government forecasts growth in mainland gross domestic product, a measure which strips out offshore oil and gas, to increase to 2.1 percent in 2010 from 0.75 percent seen in May. Norway's mainland GDP shrank for six months before unexpectedly growing 0.3 percent in April-June.

The budget estimated the 2010 structural non-oil deficit at 148.5 billion crowns, an increase of 14.6 billion from 2009. This means spending 44.6 billion crowns extra from the oil fund compared to a "neutral year" for the economy.

Norway runs large surpluses including petroleum revenues but deficits when oil and gas money is excluded. When the fund's cash is taken into consideration, the budget projected a 2010 surplus of 172 billion Norwegian crowns ($30.52 billion).

The government lowered its 2010 unemployment forecast to 3.7 percent, down from 4.75 percent seen in May, while it expected core inflation at 1.5 percent next year. ($1=5.636 Norwegian Crown) (Additional reporting by Terje Solsvik, Richard Solem and Joergen Frich; Editing by Stephen Nisbet)

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