Does Norway Need To Achieve More Economic Freedom?

Hong Kong Skylin Economic FreedomHong Kong Skyline. Photo: Pixabay.com

Does Norway Need To Achieve More Economic Freedom?

Several international institutes, NGOs and research organizations have measured the world economies on the basis of their performance through a series of indices in the previous three years. The Norwegian economy ranks in the first in eight of these indices, ranging from happiness, heaklth, freedom of speech to democracy and several more. Amidst this impeccable performance, Norway was ranked 23rd  with an economic freedom score of 74.3 in the latest report, an ‘Index of Economic Freedom 2018’ which was published by the Heritage Foundation. Even though the ranking doesn’t seem to be mediocre, it isn’t anywhere near the best. (Hong Kong is ranked 1st with a economic freedom score of 90.2.) The multimillion-dollar question is ‘Does Norway needs to strive for more Economic Freedom? ‘

What is Economic Freedom?

It simply means the freedom of choice entitled to individuals in a society or country to acquire and use economic goods and resources without fear of intrusion from the Government or other players. Governments sometimes put restrictions and limitations hindering Economic Freedom. This limitation is so diffuse that we are unable to dissect Economic Freedom from governmental control. That is because the Government is a necessary “evil” to maintain peace and harmony among individuals. Government encroachments on our individual liberties come at a high cost, resulting in lower efficiency, inactivity and lethargy.

Indicators that deteriorate

According to the ‘Index of Economic Freedom 2018’, Norway has increased its overall score by 0.3 points with progress in freedom of labour, Government integrity and judicial effectiveness outperforming lower scores for Governmental spending, monetary freedom and fiscal health indicators. Even though there is headway in certain parameters it has to be substantial to accelerate the scores in the index.

There are three indicators that deteriorating factors according to the report, they are Government spending, Labour freedom and Tax burden.

Government Spending

Government spending is spending by the public sector on merit goods (health services and education), providing public services like salaries and road maintenance budgets and new public infrastructures like the construction of roads, motorways and bridges.

All Government spending doesn’t come out of thin air; it must be financed by higher taxation. Higher taxation drains resources from the private sector. If there was no taxation then the private sector would have judiciously used the resources for investment or consumption purposes.

So in simple terms, excessive Government spending distorts private sector spending and its effect is temporary. It eventually leads to huge public debts which have a cascading effect on future generations.

Tax Burden

Tax burden or tax incidence is the effect of a tax on economic welfare. Direct taxes like personal and corporate taxes decrease the savings and urge to invest. In the case of indirect taxes, the producer or consumer or both have to shoulder the burden. For example value-added tax, tariffs and excise taxes, etc. If the indirect tax rate is high it affects the citizens, it will decrease their consumption and business activities.

All Governments in the world impose taxes on their citizens. When the tax rate is high, individuals and businesses have access to a lesser share of their income and wealth, which lowers the incentive to work. High Individual and corporate tax rates infringe on the Economic Freedom of citizens. On the other hand, if the populace sees that it benefits them through health care benefits and the like, they will see it as a good. Finding the balance  is not easy.

Freedom of labour

Economic Freedom means that there is freedom for individuals to receive employment opportunities and get inducted into the workplace; it also means that the Corporates and small businesses have the freedom to hire labour without any restrictions and also dismiss employees who are not productive. This voluntary and free-market exchange is important for boosting productivity and increasing economic growth.

Government intervenes in the labour market in various ways like introducing minimum wages or wage control. Limits on working hours or restrictions on hiring and firing to facilitate the labourers to get employed are also key factors. In most of the countries, Labour Unions play a major role in liberating labourers from the clutches of management power, exploitation and slavery, but at the same time, the same union can become an impediment to the working environment in the country whereby they distort economic freedom. When Labour Unions become a too powerful force to reckon with, it has even lead to businesses closing down. France as an example, has painted itself into a corner many years ago, whereby Governmental employees have been guaranteed not only lifetime employment, but a yearly salary raise to boot.

To strict employment rules and regulations put the businesses at a disadvantage as it prevents free negotiations between employees and employers – ultimalely leading to a severe mismatch between supply and demand of labour, leading to unemployment.

Comparison with Hongkong (taking some of the parameters of Economic Freedom)

From table 1, we can clearly see that Hongkong tax rates are very competitive and don’t drain the resources of the private sector. In turn, it encourages corporate organizations to save taxes and invest in productive areas thereby becoming competitive in the world market. On the other end of the scale, Norway’s tax rates for both individual and business are higher.

Regarding the tax burden Hongkong rates way better than Norway, thereby creating fewer burdens for the future generations Norway of course has the luxury to amass wealth on behalf of the population from the petroleum industry, commonly known as the “oil fund”, which at the moment is at neat NOK 1.5 million for each Norwegian.

When Government spending is 48.6 per cent of the GDP in Norway, it is only at 18.0 per cent in Hongkong. As excessive Government spending finally leads to higher taxation of the private sector, it is better if Government spending is decreased.

An important area of Economic Freedom is Public debt, which is at 0.1 % of GDP, in the case of Hongkong; in contrast, Norway’s public debt is 33.2 % of GDP which is much higher. It must be mentioned that a lot of that debt is related to roads, trains and related infrastructure, which is not a major issue in a city state.

 

Comparison between Norway and Hongkong.
Country Income Tax Corporate Tax Overall Tax Government Surplus Public Debt
Norway 47.8 25.0 38.1 48.6 5.7 33.2
Hongkong 15.0 16.5 13.9 18.0 2.9 0.1

All numbers are percentage of GDP or Personal income

Source: https://www.heritage.org/index/pdf/2018/book/index_2018.pdf (Compiled by Author)

(Though the report is published in 2018, the rates may not be updated)

Combination of unique characteristics adds to the perfection

The mixed economy of Norway has unique characteristics of a free market economy coupled with the omniprecense of state ownership in critical sectors. Key sectors like petroleum, hydroelectric energy and telecommunications are at least partly owned by the state.

The unemployment rate is low and around thirty percent of the labour force is employed by the Government or local public services. The productivity level are surprisingly still among the highest in the world.

Norway having an egalitarian society, the difference between the lowest paid worker and the CEO is way less when compared to the rest of the world. The country promotes equality among citizens and so it ranks high in the Economic Freedom of the nation.

A study was done by Henrik Jacobsen Kleven based on Scandinavian countries

This paper delves deeper into the higher tax rates prevailing in Scandinavian countries (Denmark, Norway and Sweden) and how it doesn’t create any adverse effects on measures of tax compliance and real activity. It is called as the ‘Scandinavian Puzzle.’

In conclusion, he is aware of the limitations of his study and does not claim to provide an exhaustive or conclusive treatment of the above question. But the paper identifies a set of policies that can explain the ‘Scandinavian Puzzle.’

The paper finally provides the following explanations:

  1. The Scandinavian tax systems with the support of third-party information system and information trails ensure that a low level of tax evasion prevails.
  2. Broad tax bases cover individuals from different spheres of economic activity and so it further encourages low levels of tax avoidance.
  3. Tthe subsidization or public provision of goods that are complementary to working encourages a high level of labour supply. Public services like child care, elderly care, transportation, and education assist the working class.
  4. The social and cultural factors blend closely with the economic factors, making the tax system smooth without any butterfly effects in the economy.
  5. Fifthly, Scandinavian countries are small and homogenous. So racial and religious diversity is limited
  6. Sixthly, human capital is high and violent conflict is unheard of, in these countries.

Conclusion

The Norway economy is unique and so it cannot be compared with other large, diverse and different countries. When higher taxes lead to less Economic Freedom in other countries, it may not lead to any unfavourable consequences in Norway. This is largely because exports are mainly either raw materials (oil, gas, fish) or very high tech (solar panels, missiles).

Index of Economic Freedom with a set of parameters may not be suitable to gauge the Economic Freedom prevailing in Norway. The ranking may not reflect the exact economic situation. This might be the reason for the 23rd rank. This article will also become an eye-opener to other countries which have a similar setup.

Endnotes

* The burden of taxes is  by assesing the overall tax burden from all forms of taxation as a percentage of Total Gross Domestic Product (GDP).

References

https://www.heritage.org/index/pdf/2018/book/index_2018.pdf

https://www.tutor2u.net/economics/reference/Government-spending

https://www.tutor2u.net/economics/reference/merit-goods

http://www.piketty.pse.ens.fr/files/Kleven2014JEP.pdf

Wikipedia

 

© Rajesh Trichur Venkiteswaran / #Norway Today

1 Comment on "Does Norway Need To Achieve More Economic Freedom?"

  1. GREG EVANS | 1. April 2018 at 15:44 | Reply

    “The Norway economy is unique and so it cannot be compared with other large, diverse and different countries. When higher taxes lead to less Economic Freedom in other countries, it may not lead to any unfavourable consequences in Norway” WHAT . The Index says it DOES – the article is a white wash !

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