Treasury finances January - August 2000. Report date: September 22, 2000

Figures are now available for Treasury finances for the first eight months of this year. They are on a cash basis and therefore not comparable to the fiscal budget which is presented on an accruals basis. Nonetheless, these figures represent a good indication on the development of Treasury finances in the course of this year in comparison with the two previous years.

Summary
For the first eight months of this year the revenue surplus amounted to 5.2 billion krónur, compared with 7.3 billion a year ago and a deficit of 676 million in 1998. The result for this year is somewhat more favourable than had been expected. The net financial surplus amounted to 3.1 billion, compared to 7.0 billion in 1999 and a surplus of 1.0 billion in 1998. The net financial surplus represents the funds available for debt redemption which amounted to 28.5 billion in the first eight months of the year, whereas new borrowing amounted to 25.0 billion. The overall cash deficit amounted to 0.4 billion.


Summary of Treasury finances, January-August
(Millions of krónur, cash basis)

	1998	1999	2000
Revenue.................................................................	105,694	121,748	134,279
Expenditure............................................................	106,370	114,451	129,115
Revenue balance.............................……….........	- 676	7,297	5,165
Sundry capital transactions, net.......................	1,714	- 302	- 2,046
Net financial balance…….................................	1,038	6,995	3,119
Debt redemption................................................	- 17,348	- 18,324	- 28,469
Domestic….......................................................	- 7,572	- 8,653	-14,979
Foreign..............................................................	- 9,776	- 9,671	-13,490
Gross borrowing requirement.........................	- 16,310	- 11,329	- 25,350
New borrowing...................................................	17,434	9,915	24,973
Domestic….......................................................	18,626	811	2,983
Foreign..............................................................	- 1,192	9,104	21,990
Overall cash balance………..............................	1,124	- 1,414	- 377

It should be borne in mind that revenue fluctuates substantially between months, generally by about 5 billion krónur. This reflects in part the receipts of the value added tax which is collected every other month.

Revenue
Total revenue of the Treasury amounted to 134.3 billion krónur in the first eight months of this year, compared to 121.7 billion during the corresponding period a year ago and 105.7 billion in 1998. The increase of 10.3 per cent from 1999 to this year is somewhat lower than the 15.2 per cent a year earlier. The increase in tax revenue shows the same pattern; the rise this year amounted to 11 per cent compared to 16.3 per cent a year ago. The slower rise this year appears to indicate that the expansion in the economy is no longer as pronounced as in recent months.

Treasury revenue, January-August
(Millions of krónur, cash basis)

				Change in	per cent
	1998	1999	2000	1998-1999	1999-2000
Total tax revenue...............................	97,017	112,798	125,217	16.3%	11.0%
Taxes on income and profit..............	24,496	29,473	34,952	20.3%	18.6%
Personal income tax…......................	19,262	22,396	25,645	16.3%	14.5%
Corporate income tax.......................	2,662	4,051	4,901	52.2%	21.0%
Other taxes on income and profit…	2,572	3,025	4,405	17.6%	45.6%
Social security taxes..........................	10,363	11,481	12,540	10.8%	9.2%
Net wealth taxes................................	4,837	5,212	5,845	7.8%	12.1%
Taxes on goods and services............	57,097	66,346	71,674	16.2%	8.0%
Value added tax ............................	34,811	41,178	45,512	18.3%	10.5%
Other indirect taxes.........................	22,285	25,168	26,162	12.9%	3.9%
Of which:
Excise tax on motor vehicles…..	3,184	4,159	3,689	30.6%	-11.3%
Excise tax on petrol……………	4,575	4,686	5,199	2.4%	10.9%
Diesel weight tax………………	2,453	2,859	3,294	16.6%	15.2%
Tobacco and liquor taxes……..	5,075	5,502	5,816	8.4%	5.7%
Other taxes........................................	225	285	207	26.7%	-27.2%
Other revenue...................................	8,677	8,950	9,062	3.1%	1.3%
Total revenue....................................	105,694	121,748	134,279	15.2%	10.3%

As in recent months. the rise in tax revenue is the main reason for the increase in overall revenue. This applies to the personal income tax as well as the corporate income tax and the capital gains tax. The personal income tax yielded 3.2 billion more revenue in the first eight months of this year than in the corresponding period of 1999 and the corporate income tax 900 million. The capital gains tax also yields sharply increased revenue, 55 per cent, due to considerably increased activity in the financial market, especially to rising share prices.

Total indirect taxes are increasing much less this year than last. The increase come to 8 per cent this year as against 16.2 per cent last year. This corresponds to a 2-3 per cent real increase this year which is a sharp drop from last year's 13-14% increase. This reflects a far lower increase in demand, since real disposable incomes have increased by much less than they did a year ago. This is clearly reflected in receipts from the value added tax; this year's increase is 10S per cent as against 18 per cent last year. The increase in other indirect taxes is lower, about 4 per cent compared to 13 per cent last year.

The increase in other indirect taxes is also of interest. The excise tax on motor vehicle imports rose by 30 per cent last year whereas this year they have declined by 11 per cent. The main reason for the decline is a drop in vehicle imports this year as well as an amendment in the excise tax schedule for heavier passenger cars.

The excise tax on petrol increased by 10.9 per cent this year as against only 2S per cent a year ago. This may seem strange at first sight. The excise tax was changed last October from an ad valorem tax to a fixed krónur rate. This was done to mitigate the impact of rising petrol prices. The increase between 1999 and 2000 is due to the fact that petrol prices were relatively low in the first eight months of 1999 and the excise tax proceeds did therefore not increase much. Prices rose as the year progressed and the excise tax proceeds increased in concert until the tax was amended. The impact of the change in the tax has caused a loss of revenue to the Treasury of about 1 billion krónur on an annual basis. The increased proceeds from the petrol tax this year also reflect increasing petrol sales in concert with rising vehicle ownership. The diesel weight tax, which is an annual weight and mileage tax and not linked to the price of diesel fuel, rose by 15 per cent this year and 16 per cent last year. It is also notable that revenue from the tax on wine and liquor, as well as the profits of the State Tobacco and Liquor Monopoly, rose by only 6 per cent this year as against 8 per cent a year ago. Other income, such as from dividends, interest and profits from asset sales, have changed little. They amounted to about 9 billion so far this year, increasing marginally over last year.

Expenditure
Total Treasury expenditure amounted to 129.1 billion krónur in the first eight months, an increase of 14.7 billion or 12.8 per cent from last year. lose to a third of this increase, 4.3 billion, is ascribable to increased interest expenses which in turn are due to prepayment of domestic government debt. Excluding interest, the increase comes to 9.8 per cent between the two years. which is slightly more than general wage and prices would indicate.
Administrative expenditures cover the administration of the central government, law enforce-ment and the foreign service. These have increased by 15 per cent between the first eight months of 1999 and 2000, partially because of a large increase in police pay and a temp-orary increase in outlays due to the 1000-year Christianity Commeroration which was held in July. Expenditure of the foreign service remains nearly constant between the two years.


Treasury expenditure, January-August
(Millions of krónur, cash basis)

				Change in	per cent
	1998	1999	2000	1998-1999	1999-2000
Administration....................................	11.363	12.614	14.552	11.0%	15.4%
General administration.......................	5.474	6.199	7.470	13.2%	20.5%
Law enforcement…….......................	4.171	4.530	5.174	8.6%	14.2%
The foreign service...........................	1.718	1.885	1.909	9.7%	1.2%
Social expenditure..............................	67.555	73.221	79.357	8.4%	8.4%
Of which:
Education and culture……........	12.675	13.708	14.827	8.1%	8.2%
Health………...........................	19.486	22.180	24.950	13.8%	12.5%
Social security ……………….	27.260	29.089	30.888	6.7%	6.2%
Other social expenditure.........	6.592	6.528	6.772	- 1.0%	3.7%
Economic affairs.................................	15.412	16.335	17.183	6.0%	5.2%
Of which:
Agricultural support.................	5.917	5.878	6.022	-0.7%	2.5%
Communications.......................	7.205	7.626	8.213	5.8%	7.7%
Interest…............................................	9.237	8.618	12.948	-6.7%	50.2%
Other expenditure..............................	2.803	3.664	5.074	30.7%	38.5%
Total expenditure...............................	106.370	114.451	129.115	7.6%	12.8%

More than 60 per cent of expenditure, about 79 billion krónur, were spent on various social purposes, such as education, culture, health and social security. The expenditures in this category rise by a total of 8 per cent whereas individual expenditure items differ widely. Outlays for hospital costs increase by 12S per cent whereas other transfer payments, such as social security entitlement benefits increases by just over 6 per cent. Such benefits increase in concert with general wage rates, but the rise is mitigated by the linkage of benefits to other incomes. Lower unemployment has also led to reduced unemployment benefits. Unemployment has been about 1S per cent so far this year, as against about 2 per cent last year.

Expenditure on economic affairs, amounting to 17 billion in the first eight months of 2000, includes 6 billion in agricultural support and more than 8 billion for communications, mostly for road and harbour construction. This overall expenditure category rose by 5 per cent from last year with outlays for roads increasing 7.7 per cent. The agricultural support expenditures are in accordance with an agreement between the Government and the Farmers' Union and road construction follows a four-year programme for this activity.

As noted earlier, interest payments increase by 4.3 billion krónur between the years, considerably in excess of budget assumptions, which is mostly due to repayments of domestic Treasury bonds before maturity. Such bonds are zero-coupon bonds that accumulate interest over their life which is due at maturity. The interest payment therefore shows up in full on a cash basis in the year of redemption, whereas on an accruals basis, as is used in the annual government accounts, the interest is booked in the year incurred. The large payments of interest, when debt is being reduced before maturity, therefore shows up as a large payment on a cash basis but not on an accruals basis. Other expenditure increases by 1.4 billion krónur which is mainly due to amended accounting procedures for supplementary contributions paid to the Government Employees' Pension Fund.

Capital transactions
The "Sundry capital transactions" in the first table above covers such items as credit extended by the Treasury and repayments thereof, sales of shares in public enterprises and changes in short-term accounts. Credit from the Treasury is no longer a significant item, since such transactions have declined in recent years. Repayments received in excess of new credits amounted to 1.2 billion, half of last year's amount. Payments over short-term accounts amounted to 4.5 billion and extraordinary contributions to the Government Employees Pension Fund towards future pension commitments amount to a total of 4 billion. Lastly, in-payments on account of sales of shares late last year in government-owned commercial banks amounted to 5S billion krónur. These payments were received early this year on a cash basis, whereas on an accruals basis they belong to the 1999 accounts, when the actual sale of the shares took place.

Repayments of Treasury debt amounted to 28.5 billion, 10.1 billion more than last year. The most important part of these were repayments were domestic government bonds before maturity of 9 billion krónur, double that of last year. The repayments were directed at four small bond issues which were small and traded thinly in the secondary market. Repayments of foreign debt amounted to 13.5 billion, 4 billion more than last year.

Treasury borrowing amounted to 25 billion, about 15 billion more than a year earlier. In February, the Treasury floated a foreign bond issue of 200 million Euros, the domestic proceeds of which amounted to 14S billion krónur. At that time the proceeds were used to repay other foreign debt before maturity and reduce outstanding short-term debt, chiefly Euro-commercial paper. Treasury bills outstanding declined by S billion in the first eight months of 2000, compared with a 2 billion decline a year ago.