In August 2003, the Norwegian government announced plans to alter its regionally differentiated social security scheme in order to bring it into line with recommendations made by the EFTA Surveillance Authority (ESA). The scheme is a regionally differentiated tax levied on employers for the use of employees, and represents an important regional policy measure in Norway, encouraging employment in the most disadvantaged regions.
At a joint press conference in late August 2003, the Minister of Local Government and Regional Development, Erna Solberg, and the Minister of Finance, Per-Kristian Foss, outlined the Norwegian government’s plan to change the current 'differentiated' social security scheme with a view to bringing it in line with recommendations made by the European Free Trade Association Surveillance Authority (ESA). The scheme is a regionally differentiated tax levied on employers for the use of employees, and represents an important regional policy measure to encourage employment and residence in the more disadvantaged areas of Norway. The scheme has been an issue of contention between Norway and the ESA since the European Economic Area (EEA) Agreement was concluded in 1992, and despite numerous meetings and correspondence over the past couple of years, the Norwegian government has not managed to defend the scheme against increasing pressure for change from the ESA as well as the European Commission. The economic and employment-related effects of the proposed changes are difficult to foresee, but they are expected to have significant financial consequences for companies in the more disadvantaged regions of Norway.
The current scheme
The differentiated social security scheme was introduced in 1975, and is essentially a regionally differentiated tax levied on employers for the use of employees. It is calculated as a proportion of the individual employee's total wage. To this end Norway has been divided into five geographical zones with different 'employment tax' rates, with a reduced employer's contribution for the use of labour for companies located in the more disadvantaged regions (zones). The highest tax rate of 14.1% is found in zone 1, which includes the most central areas of Norway. Approximately 80% of Norwegian employees are located in zone 1. The lowest rate (in effect a zero rate) applies to the northernmost regions of Norway (the whole of Finnmark and parts of Troms). The original idea behind the introduction of the scheme was that providing a tax advantage for employment in regionally disadvantaged areas would boost demand for labour in these areas, and 'maintain the main characteristics of settlement and provide equal living conditions through out the country' (St Meld. Nr 34, 2000-2001 on regional policy). Hence, the scheme has long been an important regional policy initiative.
However, the scheme has been a thorn in the side of the relationship between Norway and the ESA for a long time. The ESA has long argued that the scheme is contrary to the EEA Agreement's rules regarding state aid, and specifically Article 61 of the Agreement. Norway, on the other hand, has always maintained that the scheme is part of the ordinary tax system, and as such falls outside the scope of this Article. Furthermore, the ESA has, according to the Norwegian authorities, failed to consider the important effects on employment policy in its assessment of the scheme. The ESA's argument has not been against state aid as such, but that the Norwegian scheme is too general, and wants to see a more individual treatment of companies on a case-by-case basis regardless of geographic location. This, according to the Norwegian authorities, will serve to undermine the scheme's effectiveness, and make it far too bureaucratic and expensive. The ESA concluded that the scheme distorted or threatened to distort competition within the EEA, and for that reason 'Norway must undertake the necessary measures to ensure that the identified infringements of Article 61(1) are brought to an end' (Aid No. 95-010).
The dispute between Norway and ESA was settled in the EFTA Court in 1999, when the Court ruled in favour of the ESA (Case E-6/98). Following this ruling, a slightly modified version of the differentiated social security scheme was temporarily accepted by the ESA, interpreting the scheme to be an indirect form of transport aid. The implication of these early changes included increased employment tax premia for certain companies in specific industrial sectors regardless of geographical location. However as a result of changes in the interpretation of EEA rules pertaining to regional transport aid in a case involving a similar scheme in Sweden, the ESA carried out a new inspection of the Norwegian scheme in 2002. Faced with the new inspection, the Norwegian government decided to consider and propose changes to the scheme, which in effect means that the employment tax rate will be increased and harmonised in all zones except zone 5.
Consequences of changes
A number of studies have been carried out to assess the implications of abolishing the differentiated social security scheme. There is a general consensus about the importance of the scheme to the most disadvantaged areas of Norway. The studies agree that the nature and degree of the effects of abolition will depend on the individual companies' ability to adapt to the changes in relation to both their product markets and the labour market. Thus the question is whether these companies are able to transfer the burden of increased costs onto either the consumer or the employee.
A committee (Effektutvalget) was set up in the autumn of 2001 to look at the effects of altering the scheme. The cost of abolishing the scheme in all zones (including zone 5) is estimated at around NOK 8 billion (equally divided between the private and public sector). The committee estimates that without a transfer of the cost burden to prices or wages in the short term, private enterprises may see a reduction in their employment rate of between 4% (zone 2) and 11% (zone 5) - involving approximately 30,000 employees in total. The changes are not expected to have significant effects on employment at national level, but will pose a significant challenge to individual companies at the regional level. The committee concludes, however, that if appropriate measures are taken by the government, these effects may to some degree be remedied, in particular in the long term.
Proposed new measures to remedy effects of abolition
The most significant measure taken by the government in mitigating the effects of abolition has been to use the 'opt-out' clause in the EEA Agreement (Article 1 (2) paragraph 3 of protocol 3), and thus circumvent the Agreement, in order to allow a continuation of the scheme in zone 5, the most northerly parts of Norway. This is the first time that the opt-out clause has been used, and Norway had to hold several rounds of talks with the other two non-EU EEA countries (Liechtenstein and Iceland) to win support for its decision. A differentiated scheme will also be maintained in most parts of the primary industries (agriculture, fisheries, and forestry), since this sector for the most part falls outside the scope of the EEA Agreement (Article 8(3) and Protocols 3 and 9 to the Agreement). A 'de minimis' scheme (minimum allowance) will be introduced in zones 2, 3 and 4 in compliance with the rules for state aid in the EU. As such, the total amount of aid awarded will not exceed a threshold of EUR 100,000 per company over a three-year period, and will thus benefit only the smallest companies.
The Norwegian authorities have also given notification of a transitional period for zones 3 and 4, with a gradual increase in the tax rate, which will allow the affected companies time to adapt to the new cost situation. Furthermore, a new regional transport scheme will be introduced, in which transport aid is given in areas that qualify for regional aid on the basis of a population density test (according to the ESA’s guidelines concerning national regional aid). Aid may thus be given only in relation to extra costs involved in transporting goods inside national territory. The present regional (direct) transport scheme is to be continued. Although no specific measures have been proposed in this regard, the government maintains that the public sector will be fully compensated, and as such will not suffer in the same way as the private sector from the effects of the changes.
Commentary
A total abolition of the differentiated social security scheme will have significant consequences for companies and employment in the less populated regions of Norway, not least in the light of the present economic and employment situation in Norway. The implication of this may well be significant job losses in the affected regions themselves (zones 2,3 and 4), but also in the longer term increased pressures in the more urbanised areas (zone 1). The measures proposed by the government may help to remedy some of these effects, but overall they are not seen as being able fully to compensate for elimination of the present differentiated social security scheme. The government has pledged that it will cooperate closely with the regions and industries concerned to find more appropriate ways of compensating the extra costs generated by the increased tax burden, including through improvements to infrastructure. The ESA has yet to complete its final investigation of the proposed measures, which may well result in calls for further alterations. For example, the ESA has previously expressed reluctance over allowing a transitional period for phasing out the scheme.
Whatever comes out of the ESA investigation, it is now clear that Norway has lost its most effective and comprehensive regional employment policy instrument. The importance of the scheme has been reflected in intense debates on the matter both in the media and in parliament (the Stortinget). In some quarters, the abolition of the scheme is seen as reflecting a weakening of the powers of national policy-makers and of national politics. Others argue that the government took action too late, and that the matter has been neglected by successive governments since the ESA first called for changes to the scheme. (Håvard Lismoen, FAFO Institute for Applied Social Science)