News release January 5, 2001. The 2001 fiscal budget

January 5, 2001

The fiscal budget for calendar year 2001 was passed by the Althingi in December with a revenue surplus of 34 billion krónur, equivalent to 4.7 per cent of GDP. This is a larger surplus than ever budgeted before and the third year in succession when the surplus exceeds 20 billion krónur. The net financial balance is expected to be larger still, 39 billion krónur or 5.3 per cent of GDP, which will be used to repay debt and otherwise strengthen the Treasury's position. The combined net financial balance for 2000 and 2001 is expected to exceed 60 billion krónur.

The 2001 budget reflects the continuing strong position of Treasury finances as well as the underlying strength of the Icelandic economy at present. The strong fiscal stance will contribute to economic stability, both in the short and the long run. Treasury expenditure, measured in relation to GDP, is projected to remain broadly unchanged from the 2000 estimate, whereas it is expected to decline from the levels of 1998 and 1999. Tax revenue in relation to GDP is expected to decline slightly in 2001. Total revenue will increase, however, due to sales of government assets.

Main changes from the budget bill.
The main change in the budget from the budget bill relates to the decision by the Government to sell off its assets in 2001, mainly in the Telecommunication Company but also possibly in the two banks. This is expected to yield more than 18 billion krónur in gross revenues, 15-16 billion net.

Other changes on the revenue side are mostly due to upward revisions of personal income and social security taxes as well as the value added tax due to more buyoant economic activity than previously estimated. On the other hand, an agreement between the Government and the municipalities (cf. below) stipulates a cut in the central government personal income tax by 1/3 per cent, or by 1,3 billion krónur in 2001. This move follows a decision to raise the ceiling on the municipal income tax by 0.66 per cent in 2001 and by a further 0.33 per cent in 2002 and is intended to alleviate the overall effect on household disposable income. The estimated corporate income tax has also been lowered reflecting a lower than expected outturn in the year 2000. Interest income, however, is expected to increase by 2 billion krónur, directly due to the debt management transactions described below.

Treasury expenditure increase by about 9 billion krónur from the budget bill to the final budget. Three main factors explain these changes.

Firstly, 3 billions are attributable to an increase in interest expenditures, two-thirds of which are due to changes in emphasis in debt management and one-third to a lower króna exchange rate and higher expected interest rates. Thus, contrary to previous plans it is now estimated that the 15S billion krónur in foreign debt that comes due in 2001 will be refinanced abroad. Also, it has been decided to issue domestic non-indexed Treasury notes and bills amounting to 12 billion krónur in order to strengthen the domestic interest rate structure. Furthermore, the Treasury expects to prepay 15 billion krónur of its future commitments to the Government Employees Pension Fund. All in all, the Treasury intends to improve its position with the Central Bank by 14S billion krónur during 2001. The projected operations in the domestic market will be reviewed in the course of the year as circumstances dictate.

A second major expenditure item relates to an agreement between the Government and the municipalities to increase the Treasury contribution to the Municipal Equalisation Fund by 1.8 billion krónur. Two-thirds of this amount will be used to compensate for a revenue loss of the municipalities due to a reduction in property taxes in outlying areas, thus helping many smaller communities. These measures are intended to improve the finances of municipalities and will not affect public sector finances as a whole.

A third major expenditure item relates to the expected sale of government assets to the private sector which will be subject to a capital income tax amounting to 0.8 billion krónur, but this item also appears on the revenue side and therefore does not affect the overall budget balance.

Other expenditure increases are minor and widely spread, some of which reflect similar changes on the revenue side.

The main policy message of the budget.
The passage of a fiscal budget with a sizeable revenue surplus and a still larger net financial balance reflects the Government's determination to curb domestic demand after a period of above-trend growth. The net financial balance, including a substantial sale of government assets, will pave the way for further reduction of Treasury debt and future pension commitments over the next few years.


Appendix. Tables
(PDF 5K each)

Table 1. Current revenue and expenditure
Table 2. Treasury finances
Table 3. Treasury revenue
Table 4. Treasury expenditure by economic activity
Table 5. Expenditure classified by function