By Henrik Stolen and Joachim Dagenborg
OSLO (Reuters) - Norway's tax-cutting Prime Minister Erna Solberg is on track to remain in power after an election on Monday, narrowly defeating a Labour-led opposition in a campaign over how to manage the oil-dependent economy, official projections showed.
The ruling coalition of Solberg's Conservatives and Progress Party and two smaller center-right allies was projected to win 88 seats in the 169-seat parliament by Norway's Directorate of Elections, based on a count of early votes.
A victory would be historic for Solberg. No Conservative-led government has retained power in an election in Norway since 1985.
(For a graphic on Norway's parliamentary elections click http://tmsnrt.rs/2wYkVIO)
Conservative supporters at an election night party cheered, clapped and hugged each other when the first results appeared. At a Labour party gathering, supporters fell quiet.
A separate TV2 forecast gave the government and its allies a slightly wider majority of 91 seats over the center-left coalition led by Labour's Jonas Gahr Stoere.Solberg's Conservatives want to cut taxes to boost growth, while Stoere says tax hikes are needed to improve public services such as education and healthcare for Norway's 5 million citizens.
Norway's oil industry could be affected because Solberg will probably need support from two small parties, including the Liberals, who want to impose limits on exploration in Arctic waters off the northern coast.
For much of the year, Labour and its allies were favored by pollsters to win a clear victory, but support for the government has risen as the economy gradually recovered from a slump in the price of crude oil, Norway's top export.
Unemployment, which a year ago hit a 20-year high of 5 percent, has since declined to 4.3 percent, while consumer confidence is at a 10-year high.
Solberg's supporters liken her to German Chancellor Angela Merkel and say her strong-willed management is responsible for the upturn.
Norway's economy also has the cushion of a sovereign wealth fund worth almost $1 trillion, the world's biggest, built on income from offshore oil and gas.
Stoere, who sometimes compares himself to French President Emmanuel Macron, took over the leadership of the Labour Party from Jens Stoltenberg, who left Norway to become NATO's secretary-general.
Opinion polls in September on average have given Solberg and three other right-leaning parties 85 seats in parliament, the minimum needed for a majority, while Labour and parties on the center and the left are expected to secure 84 seats.
(Writing by Terje Solsvik and Alister Doyle; Editing by Larry King)