Last June, the Minister of Finance submitted a report to the Althingi regarding measures to achieve a balance in fiscal finances. The purpose was to report on the goals and measures in fiscal finances that were decided in accordance with the plans under the Stand-By Arrangement with the IMF. The report was based on the projections of economic developments and prospects for the economy and for fiscal finances that were made in the early months of the year. The work with the IMF regarding the revision of the SBA plan continued at the same time as the projections for fiscal finances were in the process of being drawn up. This necessitated the continual revision and reassessment of many of the underlying points of the plan. Some of the underlying assumptions of the plan for achieving a balance in fiscal finances have thus been revised and are therefore not in concert with the assumptions underlying the IMF review, a matter that needs to be addressed.
The main points are:
- (i) a discrepancy between the impact of restraint measures between models of the IMF and the Ministry of Finance;
- (ii) an under-assessment of the cumulative impact of restraint measures;
- (iii) macro-economic circumstances have changed;
- (iv) account was not taken of the accrued interest obligations of debt (Icesave and Central Bank debt); and
- (v) information on bank refinancing, interest cost assumptions and the refinancing of foreign debt have been updated.
The revisions do not have an impact on the main objective of the plan, i.e. the need for restraint measures remains unchanged. On the other hand some of the measures that were used to illustrate the effect on revenue and expenditure in relation to GDP have been revised. Most of the revisions point in the direction that the impact of measures taken turn out to be greater than previously estimated. The primary fiscal deficit declines faster and the surplus increases more rapidly in the longer run.
The Ministry of Finance has revised its figures accordingly in the part of the report that pertains to the SBA plan with the IMF and that needs to be in concert therewith when the IMF Executive Board reviews the plan. The main change from the earlier estimates is that the 2009 primary balance is expected to improve by 0.6 per cent of GDP and is projected to be 1.4 per cent higher in terms of GDP for the period 2010-2013. The impact is in turn reflected in estimated revenue and expenditure for future years, as expressed in per cent of GDP.
A comprehensive review of fiscal projections has not been completed and will still take some time. A revised fiscal projection will be presented at about the same time as the 2010 fiscal budget. The need for being in concert with the Stand-By Arrangement of the IMF prompts the current partial revisions of figures and must be approved by the Cabinet and be accessible both in Icelandic and English.