The IMF has recently concluded discussions with Norway under Article IV of its articles of agreement and has issued a staff report and selected issues paper on aspects of the Norwegian economy.

The mainland (non-oil) GDP growth was 2.2% in 2014, however this is projected to slow to 1.3% for 2015. The near term outlook for Norway has weakened as a result of the lower oil prices. There will be weaker private investment and consumption as a result of the decline in the offshore sector reducing the demand for mainland inputs. In the medium and longer term the IMF considers that there must be a transition away from oil-dependent growth. Resources must move from supplying the oil and gas sector towards other industrial sectors or towards exports of oil-related goods and services.

The IMF report emphasizes the need for further structural reforms to support growth. Reforms need to include changes to the taxation of residential property, reforms of the pension system and changes to sickness and disability benefits. The report also emphasizes a need for investment in infrastructure, education and research.

Taxation of residential property

The selected issues paper identifies high household debt as an underlying vulnerability for the Norwegian economy. Among other factors the tax system encourages individuals to take on debt in relation to residential property by offering preferential treatment. In addition to full tax deductibility of mortgage interest the imputed rent from home ownership is tax exempt and a home owner can rent out part of the residential property tax free.

Housing is subject to lower wealth tax than other assets and no capital gains tax is charged on the sale of residential property if the house has been owned for more than one year and it has been the owner’s home for at least twelve out of the past twenty four months. There is also tax relief on a savings scheme for house purchase by persons under 34 years old.

Measures already taken by Norway to deal with high household debt include stricter bank capital requirements and tighter parameters for risk weights on mortgage lending. Further proposed legislation includes tighter mortgage loan standards including a requirement to amortize mortgages. The IMF selected issues paper suggests that other supporting measures are necessary including a reduction of tax relief for owner occupied housing and mortgage debt. In the view of the IMF the process of gradually restricting the deductibility of mortgage interest could begin now.

Norway’s Tax Commission has proposed that the tax burden should be shifted to indirect taxes and that there should be less favorable tax treatment for residential housing as compared to other assets. The proposals of the Tax Commission include scrapping the home savings scheme for young people, abolishing the tax exemption on rental income up to 50% of the market value of private residences and increasing the valuation of properties. The IMF suggests that Norway could now begin gradually phasing in these measures.