Norway has seen several years of strong economic growth and very low unemployment. Low imported inflation has allowed Norwegians to enjoy large real wage gains with only modest increases in inflation until recently. A number of OECD countries have seen long booms brought to an end by an abrupt about-turn in housing and financial markets, while others have seen tentative upswings fade, with inflation rising under the influence of energy and commodity prices. Norway’s upswing may be slowing but shows no sign of coming to an abrupt end. Pressures that act as negative supply shocks in some countries have beneficial effects for Norway. The rise in the prices of oil and some metals, and low or falling prices for many imports, have brought considerable terms of trade gains to Norway over the past few years. Increased income from oil and gas production both benefits public finances and stimulates demand in the oil-supporting sectors of the mainland economy, contributing to the excellent growth and productivity performance that mainland Norway has been showing. However, Norway is not untouched by the ongoing slowdown in the OECD, while domestically generated inflation has also begun to pick up. Macroeconomic policy is now facing a number of difficult challenges.

The Norwegian mainland economy has expanded at a surprisingly strong pace since the 2007 Economic Survey, generating substantial real income gains, robust consumption growth and near full employment for its citizens. Favourable developments in world demand for key Norwegian exports and declining prices for many of its imports have played their part in this success. Macroeconomic policy has been tightened progressively, mostly through a long series of interest rate increases up to spring 2008 but also through a degree of fiscal restraint in 2007, and the economy seems to have started to slow in early 2008. Pressure on the labour market shows in rising wage inflation and increasing inflows of foreign labour while, paradoxically, there is only slow progress in dealing with aspects of labour and welfare policy that seem to restrict the supply of labour. Despite strong demand for labour, the compulsory education system performs rather poorly compared with many of Norway’s partners.

Norwegian policymakers face challenging times. The economy is operating with great pressure on production capacity, the labour market is tight and there are signs of overheating – which would all argue for a restrictive macroeconomic policy stance. On the other hand, the financial sector is not immune to the global financial turmoil, the housing market shows signs of a downturn, households are increasingly indebted and there are significant downside risks. The authorities responsible for fiscal and monetary policy should therefore remain vigilant and adjust their stance if the outlook changes significantly. Their forward-looking policy framework – flexible inflation targeting and the fiscal rule jointly with the creation of an overseas fund – has proved robust to shocks in the past and should continue to serve them well. Fiscal policy also needs to continue to preserve the long-term sustainability of public finances.

The labour market has become very tight as high real incomes and investment in the North Sea have stimulated demand for labour. Increasing real wage growth, some increase in participation and a continuing increase in immigration flows have been the results. Although very low unemployment and high capacity utilisation suggest the economy needs additional labour, further efforts to remove some wellknown disincentives to domestic labour supply in welfare and pension policies are needed. The strong surge in labour immigration since 2004 is a new phenomenon in Norway. It seems to have had largely beneficial consequences, although if it continued for long at recent rates it would have a considerable impact on population growth and the response of the labour market in a possible future downturn remains to be seen.

Traditionally, the Norwegian compulsory education system has focused strongly on the linked goals of equal opportunities to learn, comprehensive and inclusive education. While some of these objectives have been met successfully, a number of educational outcomes, notably measures of pupil performance at the end of compulsory schooling, are unsatisfactory. Given the significant resources devoted to education, Norway’s modest performance on certain measures suggests that resources are used inefficiently. There are many possible routes to improve efficiency. This chapter focuses on teaching quality, school autonomy, accountability and the level and composition of spending. Consistent policy actions should be taken in these areas, taking into account the multi-level structure of governance of the Norwegian education system.