By Camilla Knudsen and Gwladys Fouche
OSLO (Reuters) - Weak productivity growth is the Norwegian economy's biggest challenge and reducing reliance on its massive offshore oil sector is the new government's main priority, finance minister Siv Jensen said on Tuesday.
Oil accounts for a fifth of the Nordic nation's economy and demand from the sector has pushed costs - especially for labor and services - so high that traditional exporters are now struggling to compete, said Jensen, who took office last month.
"Productivity development has been very weak (for) the last eight years, therefore we are now focusing on growth-enhancing tax relief to stimulate the labor market, investments and saving," Jensen told Reuters in an interview.
"We will also work on large structural reforms going forward."
Norway was Western Europe's best performing economy in 2012, expanding 3.4 percent thanks to record oil investments.
But although figures on Tuesday showed a bigger than expected expansion in the third quarter, growth has faltered this year, with non-oil exports struggling and household consumption slowing - hit in part by a fall in house prices.
The central bank has said productivity stagnated over the last year as the economy slowed, investment fell and labor costs rose as companies continued to expand their workforces.
The new government has already approved tax cuts for individuals and corporations to boost growth on the mainland - seen slowing to 2 percent this year - and has promised to lower taxes further in future.
"We are working on reducing special Norwegian (import) duties that are damaging Norway's ability to compete," Jensen said. "We have already started to work on this in next year's budget, particularly when it comes to reducing the wealth tax, which is special to Norway."
Action is pressing because even the oil sector has started showing cracks, with firms postponing projects and predicting slowing or falling investments.
Norway remains in an enviable position, producing more GDP per hour worked than any other nation and beating the OECD average by 89 percent, the Paris-based organization said. Norwegians also work 20 percent less than the OECD average, however, lowering productivity.
Jensen ruled out extra stimulus to boost growth and said her aim was instead to shift spending toward helping onshore industries.
With a budget surplus exceeding 10 percent of GDP and a rainy-day wealth fund worth $800 billion, or $155,000 for each Norwegian resident, the government has more firepower than any other, but Jensen has resisted demands to spend more.
Rebuffing calls for the fund to combine investment with charitable work, she said maximizing returns will remain a priority even after the government completes a major review of the fund's activities next spring.
"The ambition has constantly been about the return," Jensen said. "It is important that Norwegian foreign policy and the oil fund are kept separate."
Norway spends about $5 billion a year on foreign aid but philanthropist and Microsoft co-founder Bill Gates and others have asked that it do more.
"An advantage for many years has been the search for the right balance between risk and return," Jensen said. "This rule will not be changed. It is important the oil fund keeps its long-term perspective and is predictable on what it does."
Jensen's Progress Party has said that three smaller entities could be split off from the main oil fund, to focus among other things on investing in renewable energy.
(Writing by Balazs Koranyi; Editing by Catherine Evans)