Treasury finances 1997-1998. 6. Fiscal outlook for 1998

Treasury Finances 1997-1998
Iceland, December 1997

Two items characterise the 1998 Budget Proposal. First, it reflects the Government's economic policy of reaching a balanced budget, reduce Treasury debt and thereby enhance the stability in the economy. Second, the Budget Proposal is now put forth under a new Act that requires the Budget to be presented on accruals basis as opposed to the cash basis on which it has hereto been presented (cf. chapter 5 above).
The Treasury finances are expected to improve further in 1998, compared to 1997. On cash basis, the revenue balance is expected to amount to 3.2 billion krónur, or 0.6% of GDP. The revenue balance on accruals basis is also positive, by 0.5 billion krónur. In comparison, the revenue balance on accruals basis in 1996 amounted to a deficit of 8.7 billion krónur.

	Cash basis - former presentation			Current presentation
Millions of krónur	Budget 1997	Estimate 1997	Budget Bill 1998	Budget Bill 1998
Revenues	126,224	130,927	137,600	163,484
Expenditures	126,100	132,200	134,438	162,963
Expenditures, excl. effects of redemption	-	128,200	-	-
Revenue balance	124	-1,273	3,162	521
Revenue balance, excl. effects of redemption	-	2,727	-	-
Operating items that do not affect cash flow	-	-	-	1,018
Cash from operations	124	-1,273	3,162	1,539
Capital transactions	1,670	-1,825	1,827	3,450
Net borrowing requirement	-1,794	3,098	-4,989	-4,989

Total revenues on accruals basis are expected to amount to 163S billion krónur, while total expenditures amount to 163 billion krónur, leaving a slight surplus on accruals basis. In comparing the figures in the Budget Proposal for 1998 with 1997 figures, we refer back to cash basis in the former presentation. Thus, total revenues increase from 130.9 billion krónur to 137.6 billion or by 6.7 billion krónur between 1997 and 1998, two-thirds of which is due to higher revenue from turnover taxes. The rise in expenditures is only 2.2 billion krónur between 1997 and 1998, from 132.2 to 134.4. This is partly due to the redemption of Treasury securities made in 1997.

Continued economic upswing contributes to growing Treasury revenues. On cash basis, revenues in 1998 are expected to exceed 1997 revenues by 6.7 billion krónur. In spite of this increase, tax revenues as a percentage of GDP are projected to fall considerably, or by 0.6% between 1997 and 1998. This lower percentage is largely due to a cut in the personal income tax.
The main changes in the Budget Proposal on the revenue side include actions to reduce the marginal tax rate of the personal income tax system. These include the two-year process of reducing the personal income tax by 4%. The general tax rate was reduced by 1.1% earlier this year; on January 1, 1998 a further reduction of 1.9% comes into effect and the final cut of 1% is effective on January 1, 1999. Furthermore, adjustment to the system of child benefits has been made in order to reduce the marginal effects (cf. further annex). In addition, the Government has decided to change the system of social security in order to reduce the marginal tax rates of social security recipients, at the same time social security benefits were raised substantially. Finally, changes were made to the Student Loan Fund, in order to reduce the payments of outstanding loans as a percentage of income.

	Former presentation		Current presentation
Millions of krónur	Estimate 1997	Projection 1998	Accruals basis 1998	Cash basis 1998
1. Tax revenues	121,830	128,215	148,106	142,307
Taxes on income and profits	22,674	23,675	37,937	34,196
Individuals	17,374	17,170	30,781	27,691
Corporations	5,300	6,505	7,156	6,505
Social security taxes	14,710	15,232	15,095	14,730
Wealth taxes	3,966	4,200	7,959	7,816
Taxes on goods and services	77,390	81,844	86,810	85,260
Value added tax	49,128	52,150	53,590	52,150
Excises	17,882	18,592	20,568	20,548
Vehicle levies	4,925	5,050	5,140	5,050
Other taxes	5,455	6,052	7,512	7,512
Other taxes	3,090	3,264	305	305
2. Operating revenue	8,397	7,485	12,785	11,130
3. Sale of assets	700	1,900	1,921	1,921
5. Capital transfers	0	0	672	672
Total revenue	130,927	137,600	163,484	156,030

are expected to amount to 37.9 billion krónur on accruals basis in 1998. Of this amount, 30.8 billion are paid by individuals, while the remaining 7.1 billion are paid by corporations. The taxes on income and profits paid by individuals include the personal income tax and the capital income tax. While the personal income tax increases due to a higher wage level, the lowering of the general income tax rate acts in the opposite direction, thus revenue from personal income taxes falls between 1997 and 1998.
Taxes on income and profits levied on individuals is much higher on accruals basis than on the former cash basis, as child benefits, interest rebates and church levies are subtracted from the cash basis, while accounted for on the expenditure side on accruals basis.


Corporate income taxes are expected to amount to 7.1 billion krónur in 1998, which is an increase from 1997, partly due to the corporatisation the Post and Telecommunications monopoly (Póstur og sími).

Social security taxes are expected to amount to 15.1 billion krónur in 1998. This is an increase compared to 1997, mostly due to higher wages and lower unemployment.

Wealth taxes continue to increase as net wealth of individuals continues to rise as the economic recovery continues. The difference in the former and current presentation lies in the fact that stamp duties are currently classified under this heading, but formerly under taxes on goods and services.

Taxes on goods and services are expected to amount to 86.8 billion krónur in 1998 and remain the largest share of Treasury revenues. The value added tax is expected to yield 53.6 billion krónur in revenue in 1998 which is an increase in line with increased economic activity.
Excises are also expected to increase in line with growth in private consumption and imports and amount to 20.6 billion krónur. Included in this category are excises on motor vehicles in the amount of 4 billion krónur, as a further increase in imports of automobiles is expected in the coming year. Excises on petrol are expected to amount to 7.2 billion krónur. Revenue from taxes on alcohol and tobacco is also expected to increase.

Operating revenue is projected in the amount of 12.8 billion krónur in 1998. This item includes profits from state-owned enterprises, rental income, interest income and numerous taxes on the use of goods or perform activities.

Sale of assets. In 1998, there are plans to sell the government's share of Iceland Prime Contractor Ltd. Also, almost half of the government's share in the new incorporated Investment Bank will be sold to the public. The book value of these assets is already accounted for (in the 1997 figures) and thus, only the value in excess of that amount will count as government revenues. These are estimated 1.9 billion krónur, for a total sale value of 6.2 billion krónur.

Capital transfers are estimated 0.7 billion krónur in 1998 and include various revenue sources formerly subtracted from the expenditure side as user charges.

Expenditures are expected to amount to 163 billion krónur in 1998. As a share of GDP, expenditures also fall considerably next year, or by 1.6% of GDP. This is largely due to lower interest payments (a shift between 1997 and 1998 due to the redemption of Treasury securities explained above), as well as lower outlays for investment and maintenance. Appropriations for welfare and education increase in 1998, while other appropriations either remain unchanged or fall.

The main changes on the expenditure side arise from government entities included in the Budget, which formerly were not accounted for in the Budget.

Operating expenditures, i.e. wages and other current expenditure are expected to amount to 62.1 billion krónur in 1998. This reflects the continued policy of curtailing expenditures. However, expenditures for nursing homes for the elderly and disabled will be raised along with other increases in expenditure for the health sector. Furthermore, outlays for education will be increased. Other operating expenditures will remain unchanged or fall slightly in 1998.
Total wage payments are estimated 47.3 billion krónur. During 1997, wage agreements were made with most public sector unions which are in effect until the year 2000, stipulating an increase in wages higher than estimated changes in the price level.

	Cash basis				Accruals basis
Millions of krónur	1996	Budget 1997	Estimate 1997	Budget Bill 1998	Budget Bill 1998
Operating expenditure	52,256	47,037	47,900	52,038	62,140
Transfer payments	49,678	51,930	52,900	56,018	68,570
Cost of capital, interest payments	23,832	13,550	17,550	12,300	16,200
Maintenance	3,936	3,853	3,800	3,730	3,730
Capital expenditures	10,028	9,730	10,550	10,352	12,323
Total expenditures	139,730	126,100	132,700	134,438	162,963

in 1998 are expected to amount to 68.6 billion krónur. Changes in the classification of transfer payments include items not previously included in the Budget, such as charges levied according to law as applies to user charges for state television and radio. These items add 2S billion krónur to the expenditure side (as well as being classified as revenues). In addition, the items previously subtracted from income tax revenue, child benefits, interest rebates and church levies are now counted as transfer payments, which adds 10 billion krónur to transfer payments.
Transfer payments to pensioners and the unemployed are estimated 24 billion krónur, compared to 21.7 billion krónur in 1997. Agricultural subsidies amount to 6.6 billion krónur which is a reduction of 0.3 billion krónur.
Currently, the central government and the municipalities are aiming to reach an agreement to the effect that the municipalities take over and finance the rent subsidy system, which was established in 1995, from 1998 on. The municipalities are aiming to include all apartments for rent, such as the apartments rented through the municipalities' social system and that all municipalities will pay rent subsidies.

Cost of capital. Accrued interest payments are estimated 16.2 billion krónur, while interest payments payable in 1998 amount to 12.3 billion krónur. This is 4.7 billion krónur lower than in 1997 and is mostly attributable to the redemption of Treasury securities initiated in early 1997, in the amount of 4 billion krónur

The difference between accrued and payable interest payments in the amount of 3.9 billion krónur surfaces in Treasury savings bonds where the interest payments accrue during the lifetime of the bond, but are only payable at maturity.

Maintenance. Appropriations for maintenance are 3.7 billion krónur. Thereof, 3.2 billion krónur are allocated for the upkeep of roads.

Capital expenditures. Appropriations for capital expenditures are 12.3 billion krónur in 1998. Outlays for road construction are estimated in the amount of 3.6 billion krónur compared with 3.3 billion krónur in 1997. Appropriations for the construction of a new ship for marine research are 1.3 billion krónur. Capital expenditures for the health sector are proposed to amount to 1 billion krónur in 1998.

The net borrowing requirement for the Treasury will, for the first time in years, be negative in 1998, in the amount of 5 billion krónur, or 0.9% of GDP. This represents a shift of 8 billion krónur from 1997. This is largely due to plans to sell government owned corporations, most notably nearly a half of the shares in a newly established Investment Bank.
Thus, Treasury debt continues to fall, from 49% of GDP at year-end 1996, down to 42S% in 1998. This development is also reflected in total public debt, which falls from 57% of GDP at year-end 1996 to 51% in 1998.
The net borrowing requirement of the overall public sector is, on the other hand, still positive in the amount of 8.1 billion krónur, or 1.4% of GDP, compared with 3.4% of GDP estimated in 1997. Nevertheless, this is the lowest figure registered since the mid 1980s.