Treasury finances in January - October 2000. Report date: November 20, 2000

Figures are now available for Treasury finances for the first ten months of this year. They are on a cash basis and therefore not comparable to the fiscal budget which is presented on an accruals basis. Nonetheless, these figures represent a good indication on the development of Treasury finances in the course of this year in comparison with the two previous years.

Summary
The net revenue surplus of the Treasury amounted to 10.4 billion krónur in the first ten months of this year, compared with 11.3 billion and 1.4 billion in the corresponding period of 1999 and 1998, respectively. The result so far this year is about 5 billion krónur more favourable than had been projected. The reason for the reduced surplus compared to last year is that interest expenditures on a cash basis have increased by close to 5 billion krónur, mainly due to to a prepayment of domestic government bonds. These are all zero-coupon bonds with interest due at the time of repayment. This also explains a substantial reduction in the net financial balance this year in addition to the fact that there is a substantial outflow on the item "Sundry capital transactions, net" which includes a 5 billion special prepayment of future pension obligations. Repayments of existing debt amounted to 34.1 billion in the first ten months of the year as against new borrowing of 28.7 billion. The overall balance was in deficit by half a billion krónur which is a 5 billion improvement on the result for the corresponding period in 1999.


Summary of Treasury finances, January-October
(Millions of krónur, cash basis)

	1998	1999	2000
Revenue.................................................................	132,616	153,210	168,973
Expenditure............................................................	131,226	141,940	158,594
Revenue balance.............................……….........	1,390	11,270	10,379
Sundry capital transactions, net.......................	3,933	13	-5,495
Net financial balance…….................................	5,323	11,283	4,883
Debt redemption................................................	-25,085	-26,288	-34,115
Domestic….......................................................	-15,271	-12,887	-20,582
Foreign..............................................................	-9,814	-13,402	-13,534
Gross borrowing requirement.........................	-19,762	-15,005	-29,232
New borrowing...................................................	19,670	9,601	28,710
Domestic….......................................................	22,502	-2,994	6,969
Foreign..............................................................	-2,832	12,595	21,741
Overall cash balance………..............................	-92	-5,404	-522

In comparing monthly figures it should be borne in mind that Treasury finances are subject to substantial fluctuations from month to month, often by as much as 5 billion krónur. This is primarily due to the collection of VAT proceeds which take place every other month.

Revenue
Total revenue of the Treasury amounted to 169 billion krónur in the first ten months of the year, compared to 153,2 billion and 132,6 billion in the corresponding periods of 1999 and 1998, respectively. The increase between 1999 and 2000 amounts to 10.3 per cent as against 15.5 per cent a year earlier. The change in total tax revenue is similar; the increase amounts to 10.8 per cent this year and 16 per cent last year. These developments reinforce the already established trend that the rise in demand and spending in the economy is slowing down.


Treasury revenue, January-October
(Millions of krónur, cash basis)

				Increase	in %
	1998	1999	2000	1998-1999	1999-2000
Total tax revenue...............................	122,280	141,830	157,169	16.0	10.8
Taxes on income and profit..............	30,426	36,442	44,072	19.8	20.9
Personal income tax…......................	24,353	28,930	33,453	18.8	15.6
Corporate income tax.......................	3,589	4,788	5,789	33.4	20.9
Other taxes on income and profit…	2,483	2,724	4,830	9.7	77.3
Social security taxes..........................	13,388	14,316	15,676	6.9	9.5
Net wealth taxes................................	5,898	6,269	7,670	6.3	22.4
Taxes on goods and services............	72,306	84,441	89,445	16.8	5.9
Value added tax ............................	44,739	52,844	57,926	18.1	9.6
Other indirect taxes.........................	27,567	31,597	31,518	14.6	-0.2
Of which:
Excise tax on motor vehicles…..	3,937	5,000	4,411	27.0	-11.8
Excise tax on petrol……………	5,743	6,167	6,461	7.4	4.8
Diesel weight tax………………	3,200	3,578	3,660	11.8	2.3
Tobacco and liquor taxes……..	6,338	6,852	7,150	8.1	4.3
Other indirect taxes..................	8,349	10,000	9,836	19.8	-1.6
Other taxes........................................	262	362	306	38.2	-15.4
Other revenue...................................	10,336	11,380	11,804	10.1	3.7
Total revenue....................................	132,616	153,210	168,973	15.5	10.3

Although the rise in tax revenue is generally lower this year than last, there is a considerable disparity in the development of individual taxes. Direct taxes are increasing far more rapidly than indirect taxes, or close to 21 per cent as against 6 per cent. The rapid growth of direct taxes is to a substantial extent due to the capital income tax. Revenue from the personal income tax also rose considerably, or close to 16 per cent, reflecting a continued rise in wage incomes, as is also evident from the recently published incomes survey of the Wage Investigation Committee. This is furthermore reflected in revenue from the Social security tax, although there the increase is lower than revenue from the personal income tax. Revenue from the corporate income tax also increases substantially or by 21 per cent. The recent annual corporate tax assessment, released in October, indicates that assessed revenue from this tax is lower than had been projected so that collection from this tax is expected to decline over the next several months.
The increase in indirect taxes so far this year corresponds to a 1S-2 per cent increase in real terms, representing a reversal of the trend a year ago when the increase amounted to 14-15 per cent in real terms. Revenue from the value added tax has increased by close to 10 per cent in nominal terms this year, about half of last year's increase. This shows clearly the reduced demand expansion in recent months.
The various excise taxes have developed quite differently in the course of this year. The excise duty on new motor vehicles rose by 27 per cent last year, followed by a 12 per cent decline this year, reflecting a 10 per cent decline in vehicle imports and possibly also a reduction in the excise duty on large private passenger vehicles this past spring.
evenue from petrol taxes have increased by 5 per cent this year as against 7.4 per cent last year. The lower rise this year is due to the fact that the 97 per cent ad valorem part of the petrol tax was changed to a fixed duty of 10.50 krónur per litre in October of last year. This has meant that petrol prices at the pump are now 12-13 krónur lower than they would have been under the previous arrangement.
The weight tax on diesel motor vehicles increased only by 2 per cent in the first ten months of the year, compared to a 12 per cent increase during the first ten months of 1999. This compares to a 16 per cent increase this year in the first nine months, indicating slow collection in October due to a shift between months in the collection of the weight tax. It should be noted in this connection that the weight tax was amended last spring so that vehicles weighing more than 14 tons could no longer pay a fixed annual charge, and the option to prepay a fixed charge for 95,000 kilometres for each year was abolished. The kilometre rate was increased at the same time. This change has led to more revenue than had been anticipated, particularly due to a substantial increase in the number of diesel motor vehicles. For this reason, it has been decided to reduce the weight tax on diesel vehicles by 10 per cent as of the next payment period.
Other revenue, such as dividends, interest income and profits from asset sales, have increased by 4 per cent in the course of this year, compared to 10 per cent last year.

Expenditure
Total expenditure of the Treasury amounted to 158.6 billion krónur in the first ten months, an increase of 16.7 billion or close to 12 per cent over the first ten months of 1999. Nearly a third of the increase, 5.2 billion, is due to increased interest payments, mainly due to prepayment of government debt with accumulated interest. Excluding interest, the expenditure increase amounts to 8 per cent, slightly less than the projected increase in national expenditure.
Administrative expenditures cover the administration of the central government, justice, law enforce-ment and the foreign service. These have increased by 13 per cent between the first ten months of 1999 and 2000, partially because of a large increase in police pay and a temp-orary increase in outlays due to the 1000-year Christianity Com-memoration which was held in July. Expenditure of the foreign service remains nearly constant between the two years; its operating expenditure is on the increase but this is mitigated by a drop in investment.
About two-thirds of expenditure, just over 97 billion krónur, were spent on various social purposes, such as education, culture, health and social security. The expenditures in this category rise by a total of 8.4 per cent whereas individual expenditure items differ widely. Outlays for hospital costs increase by nearly 12 per cent whereas other transfer payments, such as social security entitlement benefits, increase by close to 7 per cent. Such benefits increase in concert with general wage rates, but the rise is mitigated by the linkage of benefits to other incomes. Lower unemployment has also led to reduced unemployment benefits. Unemployment has been about 1S per cent so far this year, as against about 2 per cent last year. Expenditure on economic affairs rose by 6 per cent from last year with outlays for roads increasing 9.3 per cent. The agricultural support expenditures, which remain broadly unchanged between years, are in accordance with an agreement between the Government and the Farmers' Union, and road construction, the mainstay of communications expenditures, follows a four-year programme for this activity.


Treasury expenditure, January-October
(Millions of krónur, cash basis)

				Change	in %
	1998	1999	2000	1998-1999	1999-2000
Administration....................................	14,462	16,167	18,290	11.8	13.1
General administration.......................	6,779	8,056	9,383	18.8	16.5
Justice and law enforcement…..........	5,441	5,763	6,451	5.9	11.9
The foreign service...........................	2,242	2,348	2,457	4.7	4.6
Social affairs.......................................	83,556	89,782	97,315	7.5	8.4
Of which: Education and culture.........	15,265	16,732	18,137	9.6	8.4
Health........................................	24,973	27,877	31,085	11.6	11.5
Social security............................	33,243	34,760	37,096	4.6	6.7
Other social expenditure............	8,118	8,159	8,538	0.5	4.6
Economic affairs..................................	18,582	20,955	22,183	12.8	5.9
Of which: Agriculture.. ........................	6,831	7,259	7,360	6.3	1.4
Communications........................	8,718	10,205	11,158	17.1	9.3
Interest expenditure...........................	11,064	9,527	14,684	-13.9	54.1
Other expenditure..............................	3,563	5,508	6,122	54.6	11.1
Total expenditure...............................	131,226	141,940	158,594	8.2	11.7

As noted earlier, interest payments increase by 5.2 billion krónur between the years, considerably in excess of budget assumptions, which is mostly due to repayments of domestic debt before maturity. Such bonds are zero-coupon bonds that accumulate interest over their life which is due at maturity. The interest payment therefore shows up in full on a cash basis in the year of redemption, whereas on an accruals basis, as is used in the annual government accounts, the interest is booked in the year incurred. The large payments of interest, when debt is being reduced before maturity, therefore shows up as a large payment on a cash basis but not on an accruals basis.
Other expenditure increased by 0.6 billion krónur which is mainly due to supplementary contributions paid to the Government Employees' Pension Fund.

Capital transactions
The "Sundry capital transactions" in the first table above covers such items as credit extended by the Treasury and repayments thereof, sales of shares in public enterprises and changes in short-term accounts. Incoming repayments of outstanding loans exceeded new loans by 0.5 billion krónur, compared with 2.9 billion a year ago. Credit from the Treasury is no longer a significant item, since such transactions have declined in recent years. Payments over short-term accounts amounted to 6.1 billion and extraordinary contributions to the Government Employees Pension Fund towards future pension commitments amount to a total of 5 billion. Lastly, in-payments on account of sales of shares late last year in government-owned commercial banks amounted to 5S billion krónur. These payments were received early this year on a cash basis, whereas on an accruals basis they belong to the 1999 accounts, when the actual sale of the shares took place.
Repayments of Treasury debt amounted to 34.1 billion, nearly 8 billion more than last year. The most important part of these were 10 billion krónur of domestic government bonds redeemed before maturity. The redemption was directed at four small bond issues which traded thinly in the secondary market. Repayments of foreign debt amounted to 13.5 billion, the same as last year.
Treasury borrowing amounted to 29 billion, about 19 billion more than last year. Of the total this year, 22 billion were borrowed abroad and 7 billion at home. In February, the Treasury floated a foreign bond issue of 200 million Euros, the domestic proceeds of which amounted to 14S billion krónur. The proceeds were used to repay other foreign debt. In addition, 7 billion were borrowed abroad in the Euro-commercial paper market to meet domestic financing requirements. Treasury bills outstanding increased by 0.5 billion, compared with a 6 billion decline a year ago. Sales of domestic government bonds and medium-term notes amounted to 6.4 billion this year compared to 3 billion last year.
Recently, an agreement was concluded with three financial institutions on making markets in Treasury bills. These market makers have the exclusive right to bid for Treasury bills, and at the same time they are appointed as the principal market makers in Treasury bills. The purpose of the agreement is to ensure the issue of Treasury bills and strengthen their position in the secondary market. The Treasury commits itself to issue 3-4 billion krónur in three tenders. An increase in outstanding Treasury bills of 4-6 billion krónur is projected to take place in the course of next year.