The success of Norway’s investment fund

Norway has the biggest sovereign wealth fund globally, valued at around $1,7 trillion. This is primarily due to the availability of hydrocarbon reserves in the North Sea, with natural resources such as oil and gas accounting for approximately 10% of the country’s GDP.  

Norway found one of the world’s largest offshore oil fields in 1969, leading to significant economic growth. In 1990, the Norwegian parliament created the Petroleum Fund, with a percentage of oil revenue consistently invested abroad. Norway now owns around 1.5% of shares in the world’s listed companies. In 2006, the Petroleum Fund became the Government Pension Fund Global.

But why has the Norwegian government grown its sovereign wealth fund to such a significant degree? The fund provides a stable, long-term economic plan for Norway, allowing for both security and flexibility in the government’s budget. Generally, sovereign wealth funds enable governments to absorb shocks in times of economic crashes, helping markets minimise financial risks. With funds being primarily invested in assets, consistent returns grant a stable source of income for the economy. Norway’s investment in its oilfields has been a stable source of returns due to the international dependence on oil.  

Norway’s sovereign wealth fund only spends its real returns, meaning that there is no over-reliance on the fund, promoting its long-term affluence. The government can only spend a small amount of the fund per year. However, due to its scale, this still amounts to 20% of the annual government budget. Norway has used oil revenues to expand its welfare system rapidly and support the expansion of public services and employment. In the 1970s, the pension age was lowered, agricultural subsidies were increased, industrial policies were widened, and taxes were reduced. Norway’s social welfare system is well-regarded, regularly ranked highly in the ‘Better Life Index.’

In March of this year, Norway’s sovereign wealth fund struck a £570 million deal to buy a quarter of London’s Covent Garden estate

Initially, the discovery and subsequent use of such substantial oil revenues had negative consequences on Norway’s financial stability, as inflation caused credit to increase, leading to a drop in productivity. After the 1990 Norwegian banking crisis, the government undertook financial structural reform, nationalising three of the country’s four largest banks, with two being subsequently privatised. Reforming markets also entailed the removal of subsidies as well as the deregulation of the housing and electricity markets. By stabilising the market through government intervention and then allowing the free market to thrive through privatisation, Norway ultimately boosted its productivity. This, alongside its constant returns on investment through its sovereign wealth fund, has ultimately led to the immense success of its economy.  

In March of this year, Norway’s sovereign wealth fund struck a £570 million deal to buy a quarter of London’s Covent Garden estate. This estate includes more than 220 shops at the heart of London’s West End. With Norway’s sovereign wealth fund adapting over the years and proving its global prominence as a financial power, why has the UK not followed suit?

With the UK facing many short-term challenges, worsened by Brexit, any substantial, long-term investment would take away funding for struggling social welfare

The Callaghan government of the 1970s did look at setting up an oil fund, but in light of the economic crisis decided to stabilise the economy through short-term spending. Throughout the decades, the UK’s short-term spending has remained prevalent in budgetary allocations. For instance, in the recent budget, Rachel Reeves announced £22.6 billion in additional day-to-day funding for the NHS over the next two years, a 4% per year increase in real-term spending between 2023/24 and 2025/26. This spending trajectory suggests that the government will invest an average of £7.1 billion more per year in the NHS between 2025/26 and 2029/30. This is seen as a necessity due to the relative failures of the healthcare service which has been struggling, predominantly so since Covid-19. With the UK facing many short-term challenges worsened by Brexit, any substantial long-term investment would take away funding for struggling social welfare.  

Generally, we can credit Norway with having a hugely successful and competitive sovereign wealth fund. Its adaptation to the rapidly changing international markets demonstrates the weight it holds, establishing Norway as a significant financial player internationally.