80 per cent of norway ’ s national wealth ( present value of future labour ). income from oil and gas is transferred to financial assets through the government budget. these transfers are large in terms of gdp, but still minor compared with our human capital. oil and gas reserves account for about 7 percent of national wealth today, whereas in 2030 these reserves will be reduced to only 1 - 2 per cent. to meet these challenges, the norwegian government petroleum fund was established on 22 june 1990. its main objective is to manage assets and distribute wealth between generations. it also serves as a buffer against shocks : changes in petroleum revenues are absorbed by the fund, not by the domestic economy. this reduces the need for structural adjustments and thus promotes exchange rate stability. the fund invests only in foreign markets. investments are spread between equities and fixed income instruments, as well as across countries. the net annual inflow to the fund equals the net fiscal surplus plus the return on the fund ’ s capital. in march 2001, a broad majority in the norwegian parliament ( the storting ) adopted a new set of guidelines for fiscal and monetary policy. according to the new guideline for fiscal policy, petroleum revenues are to be phased in approximately in pace with the expected real return on the government petroleum fund. the guideline makes fiscal policy predictable and anchors it in a long - term strategy. it also makes policy robust to changes in oil prices and ensures that petroleum wealth will be of benefit both today and in the future. the guidelines imply that the structural non - oil budget deficit will equal 4 per cent of the total value of the fund. the non - oil deficit is thus financed by the return on the fund, ensuring both long - term fiscal balance and a continued phasing in of petroleum revenues. the use of petroleum revenues will accordingly increase as long as the petroleum fund is expanding. fiscal policy will contribute to stimulating aggregate demand in the norwegian economy every year. this annual expansionary fiscal impact poses a challenge to stabilisation policy in general and monetary policy in particular. underlying real expenditure growth has exceeded mainland gdp for the last 4 years. nominal growth in 2002 is 7 per cent. ( the deflator, mainly wages, is 4½ per cent ). measured as a share of gdp, public expenditure is growing rapidly. in 2002 alone, this share will increase by some 2½ percentage points. according to the revised national budget, an increase in expenditure of 7 per cent this year will lead

expectations of tight monetary conditions, which contributed to the recent appreciation of the krone. the nominal appreciation of the krone has been accompanied by a significant real appreciation of norwegian labour. measured in local labour costs, cost competitiveness has been deteriorating since 1997. for a time, profits in the exposed sector were not affected by the increase in labour costs, as the krone depreciated. however, this depreciation could not last, as it would have ignited domestic inflationary pressures. tight labour market conditions warrant a relatively tight monetary policy. norwegian interest rates are not very high, however, when our wage growth is compared with that of other countries. on the contrary, the recent appreciation of the krone will have a cushioning effect on inflation and thus on interest rates. since 1998, the increase in labour costs has been between 5 and 7 per cent. this year ’ s wage negotiations were no exception. it now seems evident that wage growth will be significantly higher than our previous estimate of 5 per cent this year. the carry - over to next year is also substantial, especially in retail trade and the public sector. it is evident from this year ’ s wage negotiations that our labour market is tight. norges bank kept interest rates unchanged at the executive board meeting on wednesday, 22 may. the bank changed its stance on future inflation risks. the main reason was the higher - than - projected wage increases. according to the bank ’ s assessment of the risks associated with the inflation outlook, the appreciation of the krone cannot fully counteract stronger wage growth, faster growth in consumption, a higher oil price and a somewhat more favourable global economic outlook.