October 8, 2018 / 7:05 AM / 15 days ago

UPDATE 2-Vulnerable Norwegian government plans higher 2019 spending

* Spending from wealth fund seen rising 2 pct

* Acceleration of GDP set to continue

* Government risks defection of key centrist ally

* Missed opportunity to cut spending, some economists say (Adds 2020 growth, currency, economists)

By Camilla Knudsen and Ole Petter Skonnord

OSLO, Oct 8 (Reuters) - Norway’s shaky minority government plans to further raise cash spending from its sovereign wealth fund next year even as economic growth is forecast to accelerate, its 2019 draft budget showed on Monday.

The centre-right government faces possible collapse, however, as the small Christian Democratic Party has threatened to switch its allegiance to Labour and thus bring down the cabinet of Prime Minister Erna Solberg over immigration and other policies.

Norway’s economy will grow in 2019 at its quickest pace in seven years, and speed up further in 2020, government forecasts show as the price of crude oil, the country’s key export, continues to recover.

“Today the sun is shining again on the entire country,” Finance Minister Siv Jensen said in a speech to parliament, highlighting the government’s achievements since it was first elected five years ago.

“The rate of growth now exceeds the long-term trend and is expected to rise further in the coming years,” she told a subsequent news conference.

The mainland economy, which excludes volatile changes in oil and gas output, is expected to grow by 2.3 percent in 2018, 2.7 percent in 2019 and 2.8 percent in 2020, according to government forecasts.

Under the draft budget, cash spending from Norway’s wealth fund, the world’s largest with assets of more than $1 trillion, should rise to 231.2 billion Norwegian crowns ($28 billion) next year from 226.7 billion crowns this year, Jensen said.

If passed by parliament, the 2019 budget would spend 2.7 percent of the estimated Jan. 1 value of Norway’s sovereign wealth fund, up from 2.6 percent in 2018.

The budget impulse, which measures the impact on economic growth, would be zero in 2019, up from a negative 0.1 percent in 2018.

CHRISTIAN DEMOCRATS

The Christian Democrats, deeply divided over whom to support, plan to hold a party congress on Nov. 2 to vote on whether to continue to back Solberg or instead endorse Labour leader Jonas Gahr Stoere.

“It is more than money that will determine our position. We need to have a process internally before we make a decision,” Christian Democratic finance spokesman Kjell Ingolf Ropstad told private broadcaster TV2.

While a centre-left budget would probably spend a similar amount of cash from the oil fund, it would likely raise taxes for high earners and wealthy individuals.

The central bank, which in September raised interest rates for the first time since 2011, has warned it will make gradual hikes in the coming years.

While economists said planned spending was largely in line with expectations, some said it represented a missed opportunity to curb the budget’s dependence on oil fund revenues.

The fund was set up to offer some shelter to the Norwegian economy from fluctuations in oil prices. Ideally, government spending from the fund should be curbed in times of economic growth and increased in times of crisis to stimulate demand.

“They should have held back more, not least in light of their optimistic growth forecasts,” DNB Chief Economist Kjersti Haugland said.

“It’s this risk assessment that I believe should have resulted in a somewhat lower spending level in 2019,” Sparebank 1 Markets Chief Economist Harald Magnus Andreassen said.

Norway’s currency, the crown, strengthened slightly to 9.5054 against the euro on Monday from 9.5210 just ahead of the budget’s release.

$1 = 8.2643 Norwegian crowns Writing by Terje Solsvik, editing by Gwladys Fouche/Mark Heinrich

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