Hoppa yfir valmynd
Ministry of Finance and Economic Affairs

News release. October 2, 2000. The 2001 fiscal budget

October 2, 2000

News Release

The 2001 Fiscal Budget

The main message of the 2001 fiscal budget, which is being presented to Iceland's Parliament, the Althingi, today, is that the Government will continue its adherence to a tight fiscal policy in order to ensure continued economic stability and repay government debt. The fiscal budget is therefore presented with a record surplus. The large surpluses of recent years have been used to reduce government debt and thus help preserve economic stability, counter inflation and the deficit on the current account.

The 2001 fiscal surplus amounts to 30 billion krónur.
The fiscal budget for year 2001 allows for a surplus of 30 billion krónur, equivalent to more than 4 per cent of GDP, the largest ever budget surplus in history. This will be the third year in succession with the Treasury surplus exceeding 20 billion krónur, totalling 80 billion krónur since 1999.

Debt is being sharply reduced.
The net financial surplus over this three-year period is even larger, at about 90 billion krónur, and 105 billion krónur since 1998. This large surplus has primarily been used to reduce government debt with the net debt of the Treasury expected to decline from 170 billion krónur at the end of 1997 to 100 billion krónur at the end of 2001. The net debt/GDP ratio will thereby decline from 32S per cent to 14 per cent or by more than half.

Continued tight fiscal policy.
Strong fiscal finances have offset domestic demand, thus contributing to economic stability. It is seen as important to continue along the same path of fiscal tightness over the next several years. The Government is preparing the next steps in privatising public enterprises, particularly in the financial and telecommunications sector. Such privatisation is expected to yield considerable revenue to the Treasury which will help reduce government debt still further over the next several years.

Net financial balance

Growing structural surplus.
Treasury finances have changed sharply for the better during this decade. Persistent deficits have been replaced with considerable surpluses year after year, and Treasury debt is therefore being sharply reduced. Although continued strong economic growth has been instrumental in improving Treasury finances, the structural surplus has also increased from year to year, reaching 10 billion krónur or 1S per cent of GDP this year, increasing to an estimated 15 billion krónur or 2 per cent of GDP in 2001.

Treasury revenue increasing by 15 billion krónur.
Total Treasury revenue is projected at 240 million krónur in 2001, 15 billion krónur higher than the estimate for this year. The increase is mainly expected to incur as higher tax revenue. VAT revenue is estimated to increase by 5 billion and personal and corporate income tax by 3S billion, wholly due to higher personal income taxes in concert with higher wage incomes. The corporate income tax is expected to yield less revenue next year due to reduced prospects for corporate profits compared to this year. Revenue from asset sales are estimated to increase by 2S billion krónur. This figure is uncertain, however, since decisions on asset sales have not been made, but the estimate is probably on the conservative side.

Treasury expenditure increase by 11 billion krónur.
Total expenditure of the Treasury is budgeted at 210 billion krónur, an increase of 11 billion from this year, or by 1S per cent in real terms. The increase is primarily aimed at higher transfer payments to households and increased investment. Current operational expenditure will remain unchanged and interest payments will decline. The increase in transfer payments is directed at extended childbirth leave, higher child benefits, contributions to the Student Loan Fund and a temporary increase in agricultural supports. The increase in investment is directed towards road construction in accordance with a newly passed road construction programme and to harbour construction. Present road construction bids are considered very favourable since the road construction sector is not as strained as other construction activity. Should these circumstances change, however, such construction can be postponed at short notice. Nonetheless, some projects in this area are expected to be postponed, amounting to 800-900 million krónur. In addition, other investment projects, amounting to about 1.200 million krónur, have been curtailed.

Child benefits will increase by 600 million krónur in 2001.
The Government has decided to amend the child benefit system by easing the system's incomes linkage. This is being carried out in accordance with the Government's Policy Declaration in connection with the March wage agreements. The level of income at which benefits begin to be curtailed is going to be raised and the net asset linkage will be abolished. The first of three stages of this amendment will be implemented next year. These changes will benefit all families, particularly those with low and middle incomes.

The interest credit system will be reviewed.
The present tax credit system for mortgage interest payments by homeowners has been under some criticism for encouraging undue debt accumulation. Furthermore, the system has been found difficult to understand and the income and net wealth linkage of the system has led to high marginal tax rates. These matters are being reviewed by the Ministry of Finance.

The economy is sound and new industries flourish.
This is on one hand the result of a prudent economic policy in recent years and on the other due to a number of measures undertaken to improve economic conditions both of industry and households. The Government has undertaken a wide variety of reforms to strengthen the economy by creating a competitive basis for New Economy industries in such areas as information technology, software, telecommunications and biotechnology. As a result, productivity has increased faster in most sectors in recent years than ever before. These developments have played a role in ensuring more rapid economic growth in this country than in neighbouring countries. Household purchasing power has also risen rapidly, and unemployment has been all but wiped out. Increased stability in the labour market has been assured by the conclusion of 3-4-year wage agreements, thus assuring business, wage earners and the economy as a whole of a stable economic environment.
Treasury debt

The key role of fiscal policy.
The most important task of economic policy is to safeguard the economic achievements of recent years and ensure continued stability in the Icelandic economy. Fiscal policy plays a key role in this respect and it will be geared towards upholding a sound overall economic policy, not only for next year, but for the next several years. In this context, it is deemed a realistic goal to retire the entire net Treasury debt by 2003-2004. This goal will be aimed at.


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