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UPDATE 2-Norway cuts wealth fund spending to $33.6 bln in election year budget

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OSLO, Oct 7 (Reuters) - Norway plans to reduce spending from its $1.1 trillion sovereign wealth fund next year as the economy rebounds from the COVID-19 pandemic, the centre-right minority coalition told parliament on Wednesday.

The government proposed withdrawing 313.4 billion Norwegian crowns ($33.56 billion) from the wealth fund in what will be an election-year budget, down from 404.3 billion crowns in 2020.

The so-called structural non-oil deficit for 2021 corresponds to 3.0% of the fund’s expected value at the end of 2020, the Finance Ministry said, exactly in line with parliament’s cap on spending.

The projected spending for 2020 corresponded to 3.9% of the fund’s value under a rule that allows extra withdrawals in times of economic hardship, but was still below the 4.2% projected in May.

Mainland gross domestic product, also known as non-oil GDP, is now expected to contract by 3.1% in 2020, less than the 4.0% drop seen in May, in what the government was the most severe economic setback since World War Two.

It sees a 4.4% rebound next year, but the finance ministry said the road ahead remained “fraught with uncertainty.”

“Although the upturn has been faster than we envisaged in May, the activity level is likely to remain lower than normal for a long time to come,” it said in a statement.

To pass the budget, Conservative Prime Minister Erna Solberg must win backing from the right wing Progress Party a former partner which left the government in January in a dispute over immigration and security.

The wealth fund - which invests proceeds from the country’s oil industry in foreign stocks, bonds and property - is worth about $212,000 for every Norwegian citizen.

The Norwegian crown currency strengthened by 0.3% against the euro on Wednesday, trading at 10.96 at 0620 GMT.

$1 = 9.3389 Norwegian crowns Editing by Gwladys Fouche and Tomasz Janowski

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