OSLO (AFP) - Norway, which goes to the polls on Monday, is an island of prosperity in Europe, with so much money that it literally doesn t know what to do with it.

The Nordic country faces an embarrassment of riches as it tries to figure out how to spend its huge pile of oil money without damaging the economy in the long run.

"All countries around us are forced to reduce their spending," said Oeystein Doerum, chief economist at Norway s largest bank DNB.

"Our biggest challenge is that our oil wealth is so huge we run the risk of wasting it on substandard projects that are not profitable enough."

The dilemma is all the more real because the populist right gathered in the Progress Party, which wants to abandon the cautious policies espoused by other parties, is likely to form a government with the Conservatives after the election.

Since the late 1990s, the Scandinavian country has conscientiously placed its oil revenues in a fund meant to finance the generous welfare state over the long run.

The fund invests mainly in stocks, bonds and real estate, placing the money outside Norway to avoid overheating.

In the process, it has become the largest sovereign wealth fund in the world, weighing in at $750 billion (570 billion euros), or an average 1.25 percent of the market capitalisation of each company listed in the world.

 

--- Dilapidated schools despite $750 bn ---


To make sure that the fund keeps growing, the government can withdraw no more than four percent a year -- the projected annual return -- in order balance its budget, which otherwise would be in the red.

"The fact that you can have dilapidated schools and broken roads at the same time as you have a huge oil fund belonging to society is testimony to the frugality and long-term perspective of Norway s leaders," said Doerum.

Launching a lone assault on this consensus, the Progress Party wants to remove the fiscal spending rule and spend more money on education, research and infrastructure, to lay the foundation for future growth that would prove profitable for the state in the medium term.

The problem is that the Conservatives, which are likely to lead a post-election coalition with the Progress Party, actually think the current arrangement is too generous, pointing out that as the fund continues to grow, the amount of petro-money available to the government expands proportionally.

"The most important point of negotiation between the Progress Party and us is on the nature of the expenses, not on whether to exceed the four percent," said the Conservative leader Erna Solberg, Norway s likely next prime minister.

"We will not," she added, "be part of a government that carries out an irresponsible economic policy."

Even though the Norwegian economy has slowed down, excessive injection of public money could be destabilising.

 

--- Oil money pushing wages too high ---

 

In a country where there is almost full employment, the booming oil sector is pulling wages higher than they otherwise would be. This even goes for traditional industries, which are in competition to attract skilled workers.

The result is that Norwegian industrial wages are about 70 percent above those of other European countries, severely undermining the competitiveness of the nation s exporters.

An influx of petrodollars could thus ultimately have catastrophic consequences for employment and public accounts.

"Everything depends on how the money is spent," said Torbjoern Eika, head of research at Statistics Norway. "If we choose to lower taxes, the negative effects on the economy are less pronounced... because it tends to stimulate savings in the short term," he said.

Labour Prime Minister Jens Stoltenberg, who looks set to lose the election, has warned that the draft 2014 budget to be presented in October -- probably his last act in government -- will limit the drain on the oil windfall to a level not much higher than three percent, compared to 3.3 percent this year.

This measure not only meets the economic recommendations of the International Monetary Fund, but will also have the political advantage of complicating the task of the likely future government, which has vowed to cut taxes while increasing spending on health and infrastructure.