Treasury finances 1997-1998. 1. Overview

Treasury Finances 1997-1998
Iceland, December 1997

The Minister of Finance presented the Budget Proposal for 1998 to the Icelandic Parliament, the Althing, on October 2. The Budget Proposal is now presented on accruals basis as opposed to cash basis as in previous years. This is in accordance with a new act on the presentation of the Budget and Financial Statements. The Budget Proposal is presented with a surplus, whether measured on accruals basis or cash basis.

Following is an overview of the Government's economic policy and the main features of the Budget Proposal, with a discussion on the current economic situation and outlook. Also included are the medium term prospects for the Icelandic economy and first results of generational accounting for Iceland. The main conclusions can be summarized as follows:

The Icelandic economy is now showing positive economic growth for the fifth year running. The growth is led by a surge in domestic demand, both in private consumption and business investment. A growth of 4S% is projected for 1997, with a slightly slower growth of 3S% expected in 1998.

In spite of increased activity in the economy, inflation has remained subdued and is expected to be 2% in 1997, rising to 2S-3% in 1998. At the same time, unemployment is falling from 4.3% in 1996, to 4% in 1997 and further down to 3.6% in 1998. Wage agreements were made during 1997, effective until the year 2000, thus ensuring stability in the labour market in the coming years.

The current account balance has turned negative, partly due to high business investment, and is expected to amount to a deficit of 3.4% of GDP in 1997 and 1998. In spite of this, the level of foreign debt is not expected to rise, but remain at the 1996 level of 47% of GDP through 1997 and 1998.

A new act on the presentation of the Budget and Financial Statements stipulates that the Budget shall from now on be presented on accruals basis. The main aim of this reform is to show in a concise manner the total activity of the central government and aid in assessing the long term effects.

Although there has been a change in the presentation of the Budget Proposal, there is no change in the underlying policy. The Budget Proposal reflects the main policy objective of the Government of maintaining and strengthening the stability in the economy by eliminating the deficit to ensure future growth of the economy.

With a more robust economic activity than expected, a larger surplus is now foreseen on the Budget balance than envisaged in the Budget. Instead of a near balance, a surplus of nearly 3 billion krónur is projected on cash basis in 1997. Revenues are expected to amount to 130.9 billion krónur, while expenditures are projected to be 128.2 billion krónur, when excluding the outlays due to the redemption of Government securities.

In 1998, the surplus on cash basis is expected to be 3 billion krónur. The net borrowing requirement is projected to be negative in the amount of 5 billion krónur, which constitutes an 8 billion krónur turnaround from 1997, thus lowering Treasury debt significantly between 1997 and 1998.

Measured on accruals basis, the surplus is expected to amount to 0.5 billion krónur, with revenues amounting to 163.5 billion krónur, while expenditures amount to 163 billion krónur.

The coming chapter discusses the Government's policy objectives. Chapter 3 highlights the economic developments in 1997 and outlook for 1998, as presented in the Budget Proposal. The fourth chapter discusses the fiscal developments in 1997 and deviation from the Budget. The fifth chapter outlines the changes made in the presentation of the Budget for 1998, while chapter 6 discusses the fiscal side of the economy in light of the new presentation. The final chapter focuses on the medium term outlook for the economy and discusses the first results of generational accounting for Iceland. The annex highlights recent tax reforms in Iceland, most notably a lowering of the marginal income tax for households and the introduction of an integrated tax on capital income.