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Assessments of fiscal sustainability (FS) problems should be based on present values of government revenues and expenditures over an infinite horizon. The paper shows that realistic assumptions imply that the growth rate of government expenditure components may exceed both the steady state growth rate of the economy and the relevant discount rate, which makes the FS problem immeasurably large. The common practice of ad hoc exogenous alignment of government expenditures to the steady state growth path after some distant year may significantly diminish the FS problem, since the effective discounting is likely to remain low. Low effective discounting also makes the FS assessment highly non-robust, reducing its political relevance. It suggests that the fiscal sustainability should be improved by reducing the growth rates of government expenditures, a strategy followed in e.g. the Swedish pension reform.

The paper analyses how equilibrium adjustments of the wage rate affect the scope for tax rate reductions when the government experiences an exogenous increase in non-tax revenues. It shows within a stylized model that increased revenue in the form of a tradable will increase the wage rate, which diminishes the scope for tax rate reduction, provided that the initial wage dependent government net expenditures are positive. In this case the wage rate adjustment represents an automatic channel for redistributing increased non-tax government revenues. When the revenue increases in the form a non-tradable, the wage rate adjustment reinforces the scope for tax rate reduction. Simulations on a CGE model of the Norwegian economy confirm the theoretical results, and demonstrate that the fiscal wage effect can be strikingly large.

The paper analyses the fiscal effects of productivity shifts in the private sector. Within a stylized model with inelastic labour supply, it shows that productivity shifts in sectors producing non-traded goods (N-sector) are irrelevant for the tax rates necessary to meet the government budget constraint. Also productivity shifts in the traded goods sector (T-sector) have a neutral fiscal effect, provided that the wage dependency of the tax bases and government expenditures are equal. If the wage dependency of expenditures exceeds that of revenues, tax rates must be increased in order to restore the government budget constraint. Simulations on a CGE model of the Norwegian economy confirm the theoretical results, and demonstrate that productivty growth on balance has an adverse fiscal effect. Moreover, the necessary increase in the tax rates of a productivity improvement in the T-sector is three times as high as the corresponding effect of a comparable productivity shift in the N-sector.

The Norwegian pension reform of 2006 intends to (1) improve long run fiscal sustainability by reducing the growth in public old-age expenditures, (2) strengthen labour supply incentives, and (3) maintain the main redistributive features of the present system. We assess to what extent the reform is likely to achieve these three goals, using two empirical models iteratively: We combine a detailed dynamic micro simulation of individual benefits and government pension expenditures with a CGE-model, which captures behavioural effects and equilibrium repercussions. We find that the pension reform improves fiscal balances substantially. Compared to a no-reform scenario, the payroll tax rate can be cut by 10 percentage points in 2050. Increased employment contributes more to the fiscal improvement than the reduction in pension expenditures. However, these changes are basically level effects; the reform has a surprisingly small effect on the growth rate of the necessary tax burden starting in 2020. In particular, the growth rate of public pension expenditures is hardly affected. Stronger government finances and higher employment is obtained at the expense of a significant increase income inequality among old age pensioners.

We use a CGE model to estimate the social cost of a marginal increase in public expenditure in Norway. Norway exemplifies an economy with high taxes. Distortionary taxes imply wedges between the market prices and the corresponding shadow prices. The shadow prices are unobservable, which is the rationale for using a CGE model to estimate the social cost of government consumption. The social cost is decomposed into a direct resource cost and the cost of public funds. The CGE estimate of the direct resource cost is implicitly a weighted average of different opportunity costs, reflecting distortions in the Norwegian economy. Our estimate of the resource cost equals about ¾ of the ex ante market price of the resources consumed. This gap is due to a positive labour supply response combined with a high effective tax rate on labour income. Our estimate of the social cost of raising public funds through a higher pay-roll tax is about 20 percent of the direct resource cost.

A disaggregated intertemporal CGE model is used to simulate the welfare effects in Norway of the recently implemented trade reforms including the WTO agreement, the EEA treaty, the EFTA fishery agreement and an anticipated EEA resolution on shipbuilding. These reforms affect the Norwegian economy through changes in tariffs, Non Tariff Barriers (NTBs), government procurement and subsidy policy as well as shifts in world prices and demand. Reduction of such import barriers that represent real costs for the country is identified as the most important source of welfare gains, through improved terms of trade. Due to initial distortions caused by taxes and imperfect competition, changes in the resource allocation have first order effects on welfare. In particular, this explains why the simulated reduction of employment has a significant negative impact on the total welfare gain.

We measure the effective assistance to 17 Norwegian private industries in 1989 and 1991 caused by government budgetary subsidies, indirect commodity taxes, import protection through nominal tariffs and non-tariff barriers, and electricity market distortions. The assistance effects are measured by the change in the net-of-tax value added price due to a removal of the policy measures considered. Most industries were effectively assisted, but the effective assistance differs widely between industries indicating the overall distortive effect on the industry structure. Agriculture, Food Processing and Manufacture of Beverages and Tobacco stand out as the most assisted industries. Budgetary subsidies and non-tariff barriers had the strongest effective assistance effect.

We measure the effective assistance to 18 Norwegian private industries in 1989 caused by government budgetary subsidies, indirect commodity taxes, import protection through nominal tariffs and non-tariff-barriers, price discrimination of electricity and capital income taxation. The assistance effects are measured by the change in the net-of-tax value added price. Most industries were effectively assisted, but the effective assistance differs widely between industries indicating the overall distortive effect on the industry structure. Agriculture, Fishery and Building of Ships and Oil Platforms stand out as the most assisted industries. Budgetary subsidies and non-tariff barriers had the strongest effective assistance effect.