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Seat Tax in Norway: A Step in the Wrong Direction

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Tourism has generally been an afterthought in Norway, but with the economy starting to buckle under the pressure of falling oil prices, its value has never been more appreciated. This seems to have been overlooked by the coalition government, which recently introduced legislation that many feel will stop this burgeoning industry in its tracks. A new “seat tax” of NOK80 on every airline seat for flights in and out of Norway, as well as domestic flights, has been met with widespread derision, threats, the expected closure of a regional airport and the prediction of hundreds of jobs lost. Where did it all go wrong?

Government introduces seat tax despite protests

The Norwegian tourism industry was dealt a blow in May this year with the confirmation that the government will go ahead with the controversial “seat tax” that had been proposed in budget negotiations in late 2015. The tax, of NOK80 per seat, came into effect on 1 June 2016, against a backdrop of protest from airlines, passengers, business leaders, politicians and LO, the influential nationwide union.

The most notable effect of this tax has been the announcement by Irish low-cost airline Ryanair that it will be closing its Norwegian base in Rygge, a small airport about an hour south of Oslo, with 16 routes being discontinued. Rygge, a private airport that relies on Ryanair for around 90% of its traffic, subsequently announced that it would be closing down all of its operations on 1 November, the date of Ryanair’s departure, with various reports in the national media stating that this will come at a cost of up to 1,000 jobs.

Reduced carbon footprint or more tax income through the seat tax?

Ostensibly, the “seat tax” has been packaged as environmental legislation, another progressive step by Norway in reducing its carbon footprint. According to reports, the four parties that negotiate the budget in the Norwegian parliament – Prime Minister Erna Solberg’s Conservatives (Høyre), the ‘Progress Party’ (Fremskrittpartiet), and the junior coalition partners in government to the right of Høyre, the Christian Centre Party (KrF) and the centrist Venstre party – needed to raise an extra NOK1 billion when working out the budget last autumn. Venstre pushed for this to be raised through an environmental tax and argued for an increase in taxes on petrol and diesel. However, Fremskrittpartiet, led by Minister for Finance, Siv Jensen, baulked at this idea and opted instead for the “seat tax”.

Detrimental effects widespread

Apart from the obvious detrimental effects that this legislation is having on Rygge airport and surrounding areas, particularly with the loss of so many jobs, it is also set to impact on the Norwegian travel and tourist industry as a whole. This is a sector that Norway has traditionally struggled in. Norway is one of the wealthiest countries in the world, mainly due to a well-managed, nationalised oil industry. This wealth has pushed the cost of living up to the point where the prices of hotel rooms, restaurants, bars and attractions are out of reach for many tourists.

However, the sharp drop in the price of oil over the last 18 months has begun to turn this on its head. Lower returns from oil sales have led to less drilling and exploration in the North Sea and less investment in peripheral industries. As a result, unemployment in Norway increased to 4.7% by the end of 2015, the highest it has been in the last 10 years. While this level of unemployment would be considered a sign of success for most countries, in Norway it points to a worrying decline. In addition, GDP growth has stagnated, with mainland growth only 1% in 2015, further highlighting Norway’s worrying reliance on oil.

Inbound flows boosted by the weaker currency

While this creaking of the economy is mainly bad news for Norway, it has, conversely, had the effect of boosting the Norwegian tourist industry. With the Norwegian economy under growing pressure, the national currency, the Norwegian krone, has steadily weakened against almost every other major currency. Over the course of 2015, the US dollar strengthened by just under 18% against the krone with the euro strengthening by over 6% and the British pound strengthening by over 12%. With Norway suddenly a cheaper place to visit, inbound flows have increased sharply, with the total number of overnight stays in Norway by foreign visitors increasing by over 8% in 2015. In addition, those who visit are spending more money when in Norway.

Surveys carried out by Innovation Norway, the body responsible for promoting tourism in Norway, have indicated that tourists are attracted to the stunning natural scenery and sense of adventure that Norway offers through a range of activities like hiking, fishing and skiing. In addition, Norway is an attractive destination all year round, with its world-class ski resorts increasingly popular in the winter and the fjords of the west coast an ideal summer destination. The spike in visitor numbers that has followed the softening of prices has demonstrated that people are attracted to visiting Norway when it is within their price range. This new-found popularity over the last two years has presented Norway with an opportunity to grow its tourist industry and develop its brand internationally. With the dangers associated with an over-reliance on the oil industry badly exposed over the same time frame, it is obvious that Norway is badly in need of new ways of sustaining its wealth. A thriving tourism industry could go some way plugging that gap.

Outlook bleakest for low-cost carriers

With this in mind, it is no surprise that the government’s new tax has been met with uproar across Norway. The new tax will mainly be felt by low-cost airlines, where the entire business model is based around attracting consumers to fly through rock-bottom prices. Adding NOK80 to the price of a flight of, say, NOK300, significantly increases the price and, the airlines argue, will dissuade many passengers from purchasing these tickets.

A family of four travelling to Norway on a return journey will experience an increase in costs of NOK640, thus turning a previously “low-cost” experience into something else entirely. Apart from Ryanair pulling out of Rygge, other airlines have also indicated that their operations will be affected. Local airline, Widerøe, which offers a range of domestic routes, has indicated that it will cut routes and capacity, while Norwegian and SAS have stated that they are prepared to close routes if the tax results in reduced demand.

Effects not likely to be positive for the future

Perhaps this is what the Norwegian government was planning all along. After all, reduced airline routes means less jet-fuel burned and fewer carbon emissions, thus improving Norway’s carbon footprint. However, it is hard to escape the idea that this was not a well-thought-out plan.

Although it is impossible to tell exactly how much the “seat tax” will affect the Norwegian tourist industry over the next two to three years, it is hard to be optimistic. Norway is a peripheral country that is hard to access by means other than plane, so the shortfall in tourists reaching Norway by plane is unlikely to be made up by land or sea journeys. Granted, there are many who will not baulk at the extra NOK160 that this new tax will add to a return journey to Norway, particularly business travellers. However, for many others, this will likely be a factor in rejecting Norway in favour of other destinations like Sweden or Denmark. The majority of visitors to Norway come from other European countries, where the ubiquitous low-cost airlines model and ability to easily compare prices online has created market-savvy consumers, for whom an extra NOK160, or around €20, is worth paying attention to.

With the Norwegian economy starting to show some significant cracks, and the need for alternatives to oil never greater, this feels like a major blunder and a step in the wrong direction.

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