Maureen Baird moved to Oslo in 1960 from Scotland. In her native city of Glasgow, times were hard, but she found they weren't much better in Norway. "People forget just how poor the country was. Its history was about getting out on the boat to America. We had two pairs of shoes, one for summer and one for winter. No one had any money."

Today she lives in a society which, on paper at least, enjoys the greatest affluence the world has ever seen. Its GDP in 2005 rose to £35,800 per head (that's for every one of its 4.5 million population) leap-frogging past both Switzerland and the United States, and way ahead of Britain's £21,000.

This year it will reach dizzier new heights. Forget public borrowing and the national debt - there isn't one. Instead, there's a huge tax surplus, and the national debt has been paid off.

But what do these figures mean? Are Norwegians basking in incomparable affluence? What's it really like to live in the wealthiest country on earth?

Arriving in Oslo, the airport terminal is spanking-new, enormous and eerily quiet; all signs of prestige spending projects funded by easy money. The bullet-style train into the city centre is the first warning of price shocks to come; £30 return for a 15-minute hop, but at least the ticket seller smiles. And I thought the Heathrow Express was the world's priciest train.

In oil-boom Oslo, one might expect rows of Dubai skyscrapers, swaggering executives and a glut of fat 4x4s. Instead, it's more like Birmingham city centre on a quiet shopping day. There's two big glass towers, but they were built in the 1960s and most Oslo-ites would happily see them demolished.

Perhaps the shops are quiet because, unless you're on a Norwegian salary, the prices are eye-popping. Even the well-off Danish on day-trips gasp. Norwegians, meanwhile, pour over the Swedish border every weekend just to pick up groceries. And when they fill up their (heavily-taxed) cars, the price they pay at the pump is amongst the highest in Europe. Rather like whisky in Scotland, there's no discount on petrol just because they make it there.

But don't be fooled by the sky-high prices; even after taking them into account, Norwegian incomes still top the table on a "purchasing power parity" basis. Though food and drink (especially wine) is at times gobsmackingly expensive, other goods are on a par with Britain. Housing in Oslo (despite recent rises) is cheaper than London.

So where's the money going? Is the government splashing out on schools, hospitals and lavish welfare projects? A brief visit suggests spending is indeed up - a new cancer wing here, a fancy new school gym there - but nothing that shouts boom-time.

At Uranienborg school in the west of Oslo, scaffolding covers the fabric of the building, with the (Polish) decorators hard at work. Inside, the 525 students are hard at work, too. And it's here you come closer to the contented, placid (at times almost docile) society that Norway's wealth has created.

I asked a class of 15-year-olds about their job prospects. Would they find jobs after school? Would they earn enough to buy homes and obtain the standard of living their parents enjoy?

The answer was a unanimous "yes". Unemployment is, after all, the lowest in Europe. On a claimant-count basis it is around 2.5%, close to half the level in Britain.

Another sign of contentment and economic security is the country's fertility rate. Norwegian mothers have more children per head than anywhere else in Europe except Iceland and Ireland. Norway also has among the highest level of female participation in the workforce. Squaring the circle is maternity leave that stretches to 42 weeks on full pay.

But visitors are still left scratching around for signs that they're really in the richest place on earth. Where are the Ferraris and Porsches? Why, in a country almost smug about its superior welfare standards, are there an uncomfortably large number of beggars and rough sleepers around the central station?

The answer lies in a remarkable decision taken many years ago to ringfence the flood of oil revenues from the North Sea. Every dollar earned is swept straight into what was once called the State Petroleum Fund but is now called the Government Pension Fund. The truth is that Norwegians are simply not spending their oil windfall, but putting it aside for the future. What's more, none of the money is allowed to be invested in Norway.

The fund has ballooned in size and recently became the world's biggest pension fund, for the first time outstripping "Calpers" the $200bn Californian Public Employees fund.

Auke Lont, the head of Norway's biggest economic consultancy, ECON, says: "It's almost Calvinist. These are people who almost want to punish themselves for this enormous windfall."

For now, at least, policymakers have convinced the public that spending the oil money will only result in the "Dutch disease". In the late 1970s the Dutch economy was flooded with dollars after finding huge gas deposits, and the country went on an unprecedented spending spree. The economic hangover took a decade to unwind.

But not all Norwegians buy into this frugality. The far-right, anti-immigration Progress Party has overtaken the Conservatives to become the official opposition on a populist platform of tax cuts and spending the oil wealth on hospitals and care for the elderly.

It is also tapping into xenophobia in a country that has always taken pride in its permissive liberalism. News magazines in recent weeks have focused on what are described as Nigerian prostitutes lining Oslo's equivalent of London's Oxford Street late at night and an influx of East European beggars.

The Progress Party is winning support from around a third of Norwegian voters, and its leader, Ms Siv Jensen, may easily be Norway's next prime minister. Is Norway docile and bland? Maybe not for much longer.

The artist

Name: Vanessa Baird Age: 42

Government grant: £14,000 a year in perpetuity

Child benefit: £240/month

Struggling British artists, look away. Oil-rich Norway gives life-long grants to local artists, worth around £14,000 a year, every year, until the day they retire. Then he, or she, picks up a generous state pension. What's more, the artist is under little or no obligation to produce, install or display their work.

Vanessa Baird, daughter of a Scottish mother and Norwegian father, knows she's lucky; the scheme is only open to selected artists. But for those who don't qualify, Norway still offers an extraordinary array of grants much superior to anything available in Britain.

Her guaranteed income is low by Norwegian standards, but she says: "I can at least enjoy a minimum standard of living."

A single parent, the child benefit for her three children (aged six, four and 18 months) brings in a further £240 a month, though most of that goes straight on kindergarten fees.

A watercolour artist, her studio is housed in her 19th-century four-storey home in a boho part of Oslo with more than a whiff of San Francisco's Haight-Ashbury community. British visitors might recognise shades of Paula Rego in her work, but she also paints Norwegian landscapes, in which the characters are, ahem, pleasuring themselves in the fjords.

Her home, shared with her artist mother, is strewn with old copies of The Guardian. She's concerned at increasingly vulgar displays of wealth and the country's drift away from Swedish style welfare to Anglo-Saxon capitalism. "There's a lot of new rich with piles of money and they're proud of it. Before the King died, it wasn't the thing to be ostentatious about money, but that's not the case today." The former King, she says, was the archetypal Scandinavian monarch-on-a-bicycle.

But she marries left-wing politics with patriotism and a rejection of the EU. "Norway is a very participatory democracy and we don't want Brussels pushing us around. If we want to kill our whales, we will carry on doing so. No-one's going to tell us what to do."

The teacher

Name: Gro Larsgaard

Age: 58

Pay: £36,800 (inc Oslo weighting)

Pension (from age 62): £21,800

Gro first began teaching in 1974 at Oslo's Uranienborg school, now one of the most sought-after state schools in the capital. It is close to the top of the (recently-introduced) performance league tables, and its beautiful late Victorian buildings are enjoying a facelift, in part due to oil-fuelled public spending increases.

Gro, a senior teacher who spends much of her time training junior colleagues, is justifiably proud of the school. After 32 years she remains upbeat and engaged, the opposite of the stereotypical harried and dejected state school teacher so frequently portrayed in the UK.

Her pupils have, if anything, become more studious and less rebellious. Dubbed "curling children" by educationalists in Norway, they are being pushed harder and harder by their parents to gain entry into the best pre-university colleges.

"They have a more positive outlook than ten years ago, parents are more motivated and some, at least, are studying harder than before. But as a nation we are becoming more egotistic. Before, it was about working together and being communitarian," says Gro.

The league tables were British- inspired, and deeply controversial. Now schools are resisting another British import; assessment testing from a young age.

"It's just beginning. The other day a politician was calling for testing for seven-year olds. Can you imagine?"

It is debateable how much the schools are sharing in Norway's vast oil wealth. Money is being lavished on the fabric of the buildings and, inside, classrooms are liberally-equipped with modern technology.

But pay levels have lagged soaring earnings in the private sector and teachers are feeling undervalued. The starting salary for a graduate teacher is £22,500 a year - little different to Britain, where newly-qualified teachers start next year on £20,133 or £24,168 in London. Given Norway's sky-high consumer prices, plus soaring housing costs, it leaves new teachers with little to live on.

There is constant talk of a strike over pay later this year. Gripes also include plans by the government to withdraw extra payments for what are regarded in Norway as the "heavy" teaching subjects (which include English), and longer working hours. "They seem to think that nine hours a day is not enough," says Gro.

The nurse

Name: Elisabeth Mannion

Age: 30

Pay: £28,600

Child benefit: £80/month

Neurological nurse Elisabeth Mannion could be the poster girl for Norway's contented society, its well-funded NHS and extraordinarily generous welfare system.

Elisabeth (who takes her English-sounding surname from a Sheffield grandfather) works at Ulleval Hospital, Norway's biggest. "I've got a great life, I'm really happy with my job and I wouldn't want to live anywhere else," she says.

Her daughter, Sophie, is only 15 months old but Elisabeth is back at work 35 hours a week. It's down, in part, to the kindergarten childcare system, but also to its eye-wateringly attractive maternity leave arrangements.

Elisabeth was able to take 12 months maternity leave, of which 42 weeks was on full pay. Her husband also got paid paternity leave.

Her concerns (and there's not many) are for younger nurses who now face soaring house prices. "We've had decent pay rises, but prices for apartments have gone up so much. And they've also started selling off nurses' homes to developers. We were lucky - we bought a flat for 1.3m krone and sold it for 2m (£174,000). We've bought a house in the suburbs, but it only takes 30 minutes to drive to work."

During holidays, she frequently goes to her family's country cabin. "We go skiing, take Sophie sledging, it's lovely in winter. I think I have a good life."