them as transformation of wealth – from natural resources in the ground to financial assets. this is the idea behind the norwegian sovereign wealth fund, known as the government pension fund global. chart : the petroleum fund mechanism all oil revenues are channelled to the fund. the fund ’ s capital is invested abroad, mainly in equities, but also in bonds and real estate. investments are spread across most markets, countries and currencies to achieve broad exposure to global growth and value creation, and ensure good risk diversification. 1 / 4 bis central bankers'speeches the fund was established in 1990, during norway ’ s deepest recession in the postwar period. at the time, it was not obvious that the fund would gain much in value. the government ran budget deficits in the following years. the first capital transfer to the fund was made in 1996, reflecting a net fiscal surplus. from then on, the value of the fund started to increase rapidly. higher oil revenues towards 2000 led to calls for higher spending. political pressure to spend more evolved. a fiscal rule was established in response to this development. the aim was to phase petroleum revenues into the economy gradually. the fiscal rule guides the annual transfers from the fund to the fiscal budget. it limits average petroleum revenue spending over the cycle to the expected real return on the fund – currently estimated at 3 percent – over a business cycle. the rule established a long term petroleum revenue spending strategy. the government may deviate from the 3 percent rule depending on the circumstances. if the economy is facing a severe downturn, there should be room for a more expansionary policy. during the great financial crisis, the norwegian government was able to allow public spending to increase in order to counteract the downturn. more recently, petroleum revenue spending over the fiscal budget has been less than 3 percent of the value of the fund. this has happened in a situation where the economic cycle has turned up at the same time as the value of the fund has increased rapidly. fiscal restraint has proved to be a wise policy. together, the oil fund and the fiscal rule have shown themselves to constitute a robust framework. this framework enjoys cross - party support. after the fiscal rule was introduced in 2001, all succeeding governments have based their policy on this guideline the advantages of this framework are many. first, it allows us to separate spending from income. when we smooth petroleum revenue spending over time, we reduce the risk of crowding out private businesses. at the same time, we

protect public budgets from substantial fluctuations in revenues. second, the considerable savings amassed in recent years mean that future generations will also benefit from petroleum revenues. norway ’ s petroleum wealth does not only belong to those living today. we try to be good stewards, like the farmer who cares for the soil and passes it on to succeeding generations so they too can harvest from it. in the case of norway, we pass our natural resource wealth on to our descendants in the form of financial assets. chart : the gpfg – governance model before continuing, let me say some words about the fund ’ s governance structure and the interaction between the norwegian parliament, the ministry of finance and norges bank. norges bank has been tasked with managing the fund since its establishment. the legislative basis for the fund is decided by the parliament, while the ministry lays down the management mandate that is issued to norges bank. moreover, the ministry has established a practice whereby decisive changes are submitted to the parliament for approval. according to the management mandate, the norges bank shall seek to achieve the highest possible long - term real return with moderate risk. the mandate sets the benchmark index and tracking error limits. in addition, the mandate imposes constraints on the fund ’ s investment universe. the investment strategy is largely determined by the mandate. the role of the bank and its executive board in formulating and elaborating the management mandate is to advise the ministry. this is an important job. for the ministry, the formulation of the management mandate, reporting and supervision will be important tools for ensuring that investments are managed in line with objectives. thanks to its extensive reporting, the fund enjoys a reputation of being one of the world ’ s most transparent sovereign wealth funds. for a fund with the entire population as actual owners, transparency is 2 / 4 bis central bankers'speeches vital for ensuring democratic control and confidence in investment management. chart : a large fund since the first transfer to the fund was made in 1996, the value of the fund has risen to almost three times mainland gdp. during periods of substantial oil and gas revenues, large capital transfers have been made to the fund. in this chart this is shown as the dark blue bars. the return on the fund has been solid, as shown as the light blue bars. the accumulated income from financial assets makes up a significant part of the fund ’ s current value. the yellow bars in the chart show fund withdrawals used to finance the structural non - oil budget deficit.