Treasury finances 1997-1998. 4. Fiscal developments in 1997

Treasury Finances 1997-1998
Iceland, December 1997

When the 1997 Budget was passed by Parliament, in late December 1996, negotiations on the construction of a new aluminium plant and extension of the ferro-silicon plant had not been concluded. Therefore, these were not included in the basic economic forecast underlying the Budget estimates. Furthermore, all major wage agreements expired at the end of last year and new agreements had not yet been concluded. The Budget was therefore based on an estimated average increase in wages of about 3S% in 1997.
With the two plants now under construction and with the bulk of the wage agreements already concluded, the basic forecasts have been revised upwards. The largest change is, of course, a much stronger investment activity and a larger growth in imports. Private consumption has also been revised upwards, as a result of the strong growth in real disposable income, i.a. following the new wage agreements which implied larger than expected wage increases. Domestic demand is now forecast to register a 6S% increase in 1997, compared to 3S% in the previous forecast. GDP growth is not expected to show a similar boost due to the sharp increase in imports, still a 4S% growth is projected.
As a result, it is currently estimated that the fiscal Budget will show a larger surplus in 1997 than earlier forecast, or nearly 3 billion krónur compared to a near balance in the Budget. This reflects a boost on the revenue side of about 4x billion krónur as a result of stronger domestic demand. Total expenditures are also expected to exceed the Budget estimate, by 2 billion krónur (excluding interest payments, cf. below), mostly as a result of higher wage and social security payments, but to some extent because of discretionary decisions taken after the Budget was passed and overruns in the health sector. Treasury gross debt is projected to fall in 1997, from 49% of GDP in 1996 to 45S% in 1997.

Millions of krónur	1995	1996	Budget 1997	Change	Estimate 1997	Forecast 1998
Revenue	114,413	127,735	126,224	4,703	130,927	137,600
Expenditure	123,344	139,729	126,100	6,100	132,200	134,438
Revenue balance	-8,931	-11,994	124	-1,397	-1,273	3,162
Per cent of GDP	-2.0	-2.5	0.0	-0.2	-0.2	0.6
Revenue balance, excl. redemption	-	-1,982	-	4,000	2,727	-
Net lending	-9,659	-713	1,670	3,495	-1,825	1,827
Net borrowing requirement	18,590	12,707	-1,794	4,892	3,098	-4,989
Per cent of GDP	4.1	2.6	-0.3	0.9	0.6	-0.9

With increased economic activity during the year, revenues have exceeded the Budget estimates. This surfaces mostly in higher income and turnover taxes due to higher purchasing power and greater imports of durable goods. Revenues were assumed to amount to 126.2 billion krónur when the Budget was passed, but are currently expected to exceed this figure by 4.7 billion krónur and amount to 130.9 billion krónur.

Cash basis, millions of krónur	1996	Budget 1997	Estimate 1997	Deviation from Budget
Income taxes	25,564	21,325	22,674	1,349
Individuals	21,371	16,775	17,374	599
Corporations	4,193	4,550	5,300	750
Social security taxes	13,569	14,185	14,710	525
Wealth taxes	3,799	3,755	3,966	211
Taxes on goods and services	76,583	78,634	80,480	1,846
Value added tax (VAT)	45,692	48,550	49,128	578
Import duties and excises	10,505	9,474	10,392	918
Liquor and tobacco taxes	7,266	7,100	7,128	28
Vehicle levies	9,224	9,415	9,710	295
Other taxes	3,896	4,095	4,122	27
Other revenue	8,220	8,325	9,097	772
Total revenues	127,735	126,224	130,927	4,703
Tax revenues	119,515	117,899	121,830	3,931

are expected to exceed the Budget figures by 1.35 billion krónur and amount to 22.7 billion krónur. Personal income taxes are expected to exceed the estimates by 600 million krónur. Wages rose more during the year than estimated in the Budget, while the effects of lowering the personal income tax was already accounted for in the Budget. Furthermore, corporate profits in 1996 exceeded expectations and thus, corporate income taxes in 1997 exceed Budget figures by 750 million krónur.

Social security taxes. Revenue from social security taxes is also higher than expected due to stronger wage growth than expected, in the amount of 500 million krónur for a total of 14.7 billion krónur in revenue.

Wealth taxes. In 1997, revenue from wealth taxes is expected to exceed Budget estimates by 200 million krónur and amount to 4 billion krónur.

Taxes on goods and services, the largest revenue source for the Treasury, are expected to yield 80.5 billion krónur in revenue in 1997, 1.8 billion krónur higher than assumed in the Budget. The value added tax is expected to yield 49 billion krónur in revenue, which is 600 million krónur higher than in the Budget, reflecting higher activity in the economy than previously forecast.
Import duties and excises are predicted to exceed the Budget figure by 900 million krónur and amount to 10.4 billion krónur. This is mostly due to a surge in imports of automobiles, but automobile imports are expected to increase by 20% this year over the previous year. However, revenues of excises on imported goods are below the Budget figure due to changes in the excise tax made at the beginning of the year, as excises were lowered or abolished on several types of goods.

Revenue from liquor and tobacco taxes are expected to exceed the budgeted figure by 30 million krónur. On the one hand, revenue from tobacco taxes are expected to increase following a 20% increase in the charges levied on tobacco. On the other hand, revenue from liquor taxes are expected to fall below the budgeted figure, due to lower sales of alcohol than previously estimated.

Other revenue is expected to exceed the Budget by 800 million krónur and amount to 9.1 billion krónur, largely due to higher profit payments of government agencies.

4.2 Expenditures
In 1997, expenditures are expected to exceed Budget appropriations by 6 billion krónur and amount to 132.2 billion krónur, 4 billion of which are due to a special redemption of Treasury securities, cf. below. Thus, other expenditures are expected to exceed the Budget figure by only 2 billion krónur, where outlays for wages are expected to exceed the Budget by 700 million krónur, due to new wage agreements. The 1997 Budget expected additional outlays to finance accrued pension rights for those moving from the old public pension system to the new system in the amount of 600 million krónur. During the year, however, fewer public employees have moved between pension funds than expected, thus the funds were used to partly finance increased wage outlays.

Millions of krónur	1996	Budget 1997	Estimate 1997	Deviation from Budget
Operating expenditure	52,256	47,037	47,900	863
Wages	42,330	37,704	38,400	696
Other current expenditure	17,126	17,110	17,300	190
Service charges	-7,200	-7,777	-7,800	-23
Transfer payments	49,678	51,930	52,900	970
Social security outlays	29,210	29,782	31,124	1,342
Unemployment insurance	3,066	2,860	2,860	0
Agricultural subsidies	6,064	5,653	5,627	-26
Student Loan Fund	1,452	1,600	1,600	0
Municipal Equalisation Fund	2,221	2,390	2,417	27
Other transfer payments	7,665	9,645	9,272	-373
Interest payments	23,832	13,550	17,050	3,500
Interest payments due to redemption	10,100	-	4,000	4,000
Other interest payments	13,732	13,550	13,050	-500
Maintenance	3,936	3,853	3,800	-53
Capital expenditure	10,028	9,730	10,550	820
Total expenditures	139,730	126,100	132,200	6,100
Total expenditures excl. redemption	129,630	-	128,200	2,100

is expected to exceed the Budget by 860 million krónur, mostly due to higher wage payments, both due to new wage agreements and general overruns.
With most wage agreements expiring at the end of 1996, the Budget assumed a general increase in the wage level of 3S%. Wage agreements were signed with most public sector unions in the middle of 1997, with a contractual increase of 4.7% in 1997.
Operating expenditures of the hospitals in the capital area are expected to exceed the Budget appropriations by 320 million krónur. Other overruns include 80 million krónur for public employment agencies, the operation of which the state took over from the municipalities during the year, 75 million krónur are due to increased foreign service and 50 million krónur due to overruns in the operational cost of secondary schools.
Against this weigh the expenditures appropriated to fully fund the accrued pension rights of members of the new pension fund, but were not utilised as fewer than expected transferred to the new fund during the year.

Transfer payments are projected to exceed the budgeted figure by 970 million krónur, as pension insurance is expected to exceed the Budget appropriations by 400 million krónur due to a discretionary decision by the Government of raising pension insurance payments. In addition, health insurance payments are expected to exceed the budget figures as previous plans for reducing outlays did not materialize.

Interest payments exceed the Budget by 3.5 billion krónur. However, 4 billion krónur are due to a special redemption of Treasury securities (cf. below) which was not included in the Budget estimates. Thus, interest payments, in effect, are 0.5 billion krónur lower than projected in the Budget.

Capital expenditure and maintenance. Outlays for maintenance are in line with Budget projections while capital expenditure is expected to amount to 10.6 billion krónur, 820 million krónur higher than budgeted. Of this amount, 400 million krónur are due to purchase and maintenance of housing for embassies overseas, while 215 million krónur are due to increased road construction and 100 million krónur due to restructuring of public buildings.

4.3 Redemption of Treasury securities
In February of this year it was decided to stage another redemption of government savings bonds (following the one in 1996). The main aim of this redemption was to simplify the structure of Treasury securities in order to enhance market activity. This will lead to a surge in interest payments in 1997, of 4 billion krónur, which in turn will be registered in the cash flow of the government accounts, i.e. affect the budget figures for 1997, while interest expenditures in 1998 and 1999 will fall. This will not, however, affect expenditures on an accruals basis.

4.4 Borrowing requirement
Although the Budget is run with a larger surplus than predicted, the net borrowing requirement exceeds estimates by 5 billion krónur. This is mostly due to the redemption of Treasury securities in the amount of 4 billion krónur, not taken into account in the Budget for 1997. The net borrowing requirement for the Treasury is expected to amount to 3 billion krónur in 1997, or 0.6% of GDP.