News release. October 1, 2001. The 2002 Fiscal Budget

October 1, 2001

News Release

The 2002 Fiscal Budget
The 2002 budget proposal is characterised by the fact that the prudent fiscal policy pursued in recent years makes it possible to meet temporary economic setbacks without endangering the achievements of previous years. Following a vigorous expansion in recent years the economy is moving towards greater balance. Despite signs of contraction, the 2002 budget proposal projects a substantial surplus which will make it possible to continue the repayment of Treasury debt. It is therefore important that the policy of strict expenditure restraint be continued at the same time as the main emphasis of economic policy must be to improve the operating conditions of business by reducing inflation, fostering economic growth and improving the standard of living. The measures projected in the budget proposal are all directed at these goals. The reduction of taxes and the Government's privatisation programme constitute an important contribution towards strengthening the foundations of the economy, by ensuring employment and a continued standard of living. These are the main points of emphasis in the 2002 budget proposal.

The Treasury position continues to be sound.

The 2002 budget proposal projects a revenue surplus of 18.6 billion krónur, equivalent to 2S per cent of GDP. The net financial surplus is still larger, 41 billion krónur. This is in full accordance with the Government's principal goal of reducing inflation and the current account deficit, thereby ensuring a sustainable stability.

The Treasury is well prepared to meet new economic challenges.

The economy has gone through a substantial change in recent months. Domestic demand has abated and the current account deficit is declining rapidly. There are prospects for a significant decline in inflation in the near future. As a result, economic growth has been reduced. This inevitably means that the revenue of the Treasury will increase less and the surplus will therefore be lower than in recent years. Thanks to a prudent economic policy, the Treasury is well prepared to meet a downturn in the economy without resorting to special measures or incur a deficit. The economic reforms of recent years have also strengthened the foundations of the economy and enabled individuals and firms to withstand temporary difficulties.

Structural surplus – future commitments met.
Despite declining economic growth and reduced economic activity, the structural surplus of the Treasury - i.e. the surplus adjusted for cyclical fluctuations – is projected to be larger than last year, 2S per cent. Virtually the entire surplus in 2002 is expected to be structural, since it is assumed that the economy will slow down in 2002 and some slack could emerge. The cyclical impact on the Treasury is therefore likely to be slightly negative.

Expenditure declines in real terms.
Total expenditure of the Treasury is projected at 239 billion krónur in 2002, increasing by 7 billion from the estimate for this year. In real terms, expenditure is expected to decline by 0.5 per cent from the 2001 estimate, after having been adjusted for pension fund liabilities. In terms of GDP, expenditure is expected to decline by 1 per cent from the 2001 estimate, which is in accordance with the Government's economic policy. General operating expenditure is reduced by 1.4 per cent in real terms whereas transfer payments rise by 2.3 per cent, reflecting the increase in social security benefits following the Supreme Court verdict to that effect as well as an increase in child benefits, following the Government's decision.

Debt is being substantially reduced.
The net financial surplus for the years 1998-2002 is estimated at about 100 billion krónur, most of which will be used to repay Treasury debt and reduce its future pension liabilities. The prudent fiscal policy of recent years has resulted in a substantial reduction in debt. The net debt of the Treasury has declined from 34 per cent of GDP in 1995 to an estimated 22 per cent at the end of 2001. The 2002 budget projects a reduction down to 14 per cent by the end of 2002.

Interest expenditure declines in real terms.

In recent years,the reduction of Treasury debt and stronger financial position has resulted in lower net interest payments of the Treasury in real terms. A conservative estimate of the annual interest saving as a result of a 100 billion krónur reduction in Treasury debt is about 5 billion krónur.

Important steps in privatisation of government enterprises.
Important steps will be taken in the privatisation of government enterprises in 2001 and 2002. A large part of the Government's stake in Landssími, the telephone company, and the two commercial banks, Landsbanki and Búnaðarbanki, will be sold. The sales of these assets are expected to return significant proceeds to the Treasury, in addition to bringing the benefits of an increased competitive environment to the economy, as the Government intends.

Room for tax reductions.

In the present circumstances, there are good reasons for reducing taxes, both on enterprises and individuals. These issues have been extensively discussed within the Government's majority parties in recent months. The strength of fiscal finances and a prudent fiscal policy in recent years has served to stimulated these ideas. Through prudent tax measures it will be possible to prevent a contractionary chain of events in the economy. The measures of the government can thus become a catalyst for the positive reaction of the economy to the downturn. The reduction in the tax on enterprises, on net wealth, a reduction in the stamp tax and an increase in the threshold for the personal income tax are all under consideration. Furthermore, the abolishment of inflationary accounting is being reviewed.

Other tax reforms are already under way.
The Government intends to prevent the special increase in assessed real property values from being reflected in increased net wealth taxes in 2002. The personal income tax ratio will decline by 0.33 per cent at the beginning of 2002, following the Government's decision in connection with the review of wage agreements last winter. The full transfer between spouses of the personal tax exemption will also become effective at that time.

Tax revenue unchanged in real terms.
Total Treasury revenue is estimated at close to 258 billion krónur in 2002, about 5 billion higher than the estimated for this year. In real terms, however, total revenue is expected to decline by about 8 billion between the years, which is attributable to reduced revenue from asset sales. Tax revenue is expected to decline marginally in real terms. The ratio of tax revenue to GDP has been declining in recent years and is expected to decline by a further 0.5 per cent in 2002.

Fiscal policy continues to play a key role in economic management.
In the present setting of a fully liberalised capital market, the role of fiscal policy in overall economic management has changed from earlier years. Fiscal policy can no longer be applied in the same manner as before in order to amend economic fundamentals in a rapid manner. Fiscal policy is now more directed at ensuring economic stability in the longer run. This is best done by ensuring an adequate budget surplus and creating a tax environment that is favourable for households and enterprises. The developments of recent years are a clear sign of the success that already has been achieved.

The Ministry of Finance, October 1, 2001