Treasury finances in January- September 2000. Report date: October 20, 2000

Figures are now available for Treasury finances for the first nine 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
The revenue surplus amounted to 4.9 billion krónur in the first nine months of this year, compared to an 8.1 billion surplus a year ago and a deficit of 2.3 billion in 1998. The result this year is about 6 billion krónur better than projections for the year had anticipated. The reason why the surplus this year is lower than last year is that interest payments have exceeded estimates, largely due to a special prepayment of domestic government bonds that accumulated interest until maturity. Such lump-sum payments of interest are reflected in the cash-flow figures whereas in the accounts on an accruals basis they are entered as expenditure in each year when they are incurred. Excluding such interest payments, the revenue surplus would have been about 2 billion higher than last year. The net financial surplus amounted to 1.6 billion krónur as against 7 billion a year ago and a S billion in 1998. This balance indicates the ability of the Treasury to repay debt. Debt repayments of debt amounted to 28.8 billion and new borrowing to 21 billion. The overall deficit amounted to nearly 6 billion which was reflected in a drawdown of deposits with the Central Bank.


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

	1998	1999	2000
Revenue.................................................................	115,787	135,145	148,440
Expenditure............................................................	118,054	127,005	143,572
Revenue balance.............................……….........	-2,267	8,139	4,868
Sundry capital transactions, net.......................	1,870	-955	-3,292
Net financial balance…….................................	-397	7,184	1,576
Debt redemption................................................	-21,117	-18,846	-28,764
Domestic….......................................................	-11,341	-9,137	-15,230
Foreign..............................................................	-9,776	-9,708	-13,534
Gross borrowing requirement.........................	-21,514	-11,662	-27,188
New borrowing...................................................	19,670	8,122	21,441
Domestic….......................................................	20,862	-1,234	2,967
Foreign..............................................................	-1,192	9,356	18,474
Overall cash balance………..............................	-1.844	-3.540	-5.747

In comparing monthly figures it should be born in mind that Treasury finances are subject to substantial fluctuations from month to month, often by as much as 5 billion krónur. This is primarily due to the collection of VAT proceeds which take place every other month.

Revenue
Total revenue amounted to 148.4 billion krónur in the first nine months of the year, compared to 135,1 billion a year ago and 115.8 billion in 1998. The increase from 1999 is 8.9 per cent, compared to 16.7 per cent between the first nine months of 1998 and 1999. Tax revenue shows a similar pattern; it rose by 10.4 per cent in the first nine months of this year, compared to 17.3 per cent a year earlier. This slowdown in revenue growth confirms the trend towards slower growth of income and spending in the economy this year, indicating that demand pressures in the economy are abating.


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

				Increase	in %
	1998	1999	2000	1999	2000
Total tax revenue...............................	106,435	124,809	137,787	17.3	10.4
Taxes on income and profit..............	27,672	33,313	39,285	20.4	17.9
Personal income tax…......................	21,724	25,630	29,327	18.0	14.4
Corporate income tax.......................	3,277	4,544	5,347	38.7	17.7
Other taxes on income and profit…	2,672	3,140	4,612	17.5	46.9
Social security taxes..........................	11,877	12,912	14,120	8.7	9.4
Net wealth taxes................................	5,505	5,853	6,825	6.3	16.6
Taxes on goods and services............	61,128	72,412	77,304	18.5	6.8
Value added tax ............................	36,598	44,206	48,533	20.8	9.8
Other indirect taxes.........................	24,530	28,205	28,771	15.0	2.0
Of which:
Excise tax on motor vehicles…..	3,541	4,582	4,069	29.4	-11.2
Excise tax on petrol……………	5,233	5,545	5,876	6.0	6.0
Diesel weight tax………………	2,559	3,001	3,491	17.3	16.3
Tobacco and liquor taxes……..	5,738	6,197	6,430	8.0	3.8
Other indirect taxes..................	7,459	8,880	8,905	1.9	0.0
Other taxes........................................	252	319	254	26.3	-20.4
Other revenue...................................	9,351	10,336	10,653	10.5	3.1
Total revenue....................................	115,787	135,145	148,440	16.7	9.8

Although tax revenue is rising less this year than last, there are substantial differences in the growth of individual taxes. Direct taxes are increasing by close to 18 per cent whereas indirect taxes rise by only 7 per cent. The growth in direct taxes is largely influenced by the rise in the capital income tax and the corporate income tax, whereas revenue from the personal income tax rises by less.

The growth in revenue from indirect taxes corresponds to a real increase of about 2 per cent, after taking account of price increases. This represents a substantial change from the previous year when the increase in real terms was 14-15 per cent. The sharp decline in the growth of VAT revenue should be noted; in money terms it increased by close to 10 per cent this year, half last year's rate. This indicates clearly that the growth in domestic demand is moderating considerably.

The movement in individual excise taxes is particularly notable. Revenue from the excise tax on imported motor vehicles rose by more than 30 per cent last year whereas this year it declines by 11 per cent from last year's high level. This mainly reflects the drop in car imports this year, but to some extent it is due to a change in the excise tax rates last spring.

Revenue from the excise tax on petrol increased by 6 per cent this year, about the same as last year despite an increase in petrol prices by about 80 per cent between the two years. The reason for this modest increase in petrol taxation is due to the fact that the tax was amended from an ad valorem tax to a fixed rate tax per liter in October of last year. The taxation of petrol thus no longer exacerbates price fluctuations in world markets into retail prices at the pump. The impact of this change is that retail pretrol prices would be about twelve krónur higher today, if the previous tax rule had applied. A liter of 95 octane petrol costs about 96.60 krónur in October.

Revenue from the weight tax on diesel vehicles increases about the same as last year, by 16-17 per cent. Revenue this year is increasing somewhat more than had been projected, due to an increasing number of diesel-powered vehicles and increased mileage in addition to an improvement in collection of the tax. The amendments to the tax enacted earlier this year have not begun to have a significant impact on the tax. They were not intended to have a revenue impact.

Other revenue, such as dividends from government enterprises, interest income and profits from asset sales, have increased by about 3 per cent as against 10S per cent last year.

Expenditure
Total expenditure amounted to 143S billion krónur in the first nine months of the year, increasing by about 16S billion or 13 per cent from the corresponding period of the previous year. About a third of this increase, 4.9 billion, is attributable to increased interest expenditure, largely due to a prepayment of domestic government debt earlier this year. The increase in expenditure excluding interest is about 10 per cent, roughly in concert with the rise in national expenditure.

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 nine 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 Com-memoration which was held in July. Expenditure of the foreign service remains nearly constant between the two years; operating expenditure is on the increase but this is mitigated by a drop in investment.

Nearly two-thirds of expenditure, about 88 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 8.7 per cent whereas individual expenditure items differ widely. Outlays for hospital costs increase by 13 per cent whereas other transfer payments, such as social security entitlement benefits increases by close to 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.


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

				Increase	in %
	1998	1999	2000	1998-1999	1999-2000
Administration....................................	12,625	14,335	16,256	13.5	13.4
General administration.......................	6,062	7,093	8,340	17.0	17.6
Justice and law enforcement…..........	4,688	5,134	5,770	9.5	12.4
The foreign service...........................	1,875	2,108	2,147	12.4	1.9
Social expenditure..............................	74,802	81,072	88,099	8.4	8.7
Of which:
Education and culture……........	13,690	15,110	16,514	10.4	9.3
Health………...........................	22,266	24,907	28,064	11.9	12.7
Social security ……………….	29,791	31,949	33,717	7.2	5.6
Other social expenditure.........	7,325	7,179	7,643	- 2.0	6.5
Economic affairs.................................	17,128	18,673	19,801	9.0	6.0
Of which:
Agricultural support.................	6,201	6,589	6,728	6.3	2.1
Communications.......................	8,263	9,043	9,756	9.4	7.9
Interest…............................................	10,459	8,991	13,873	- 14.0	54.3
Other expenditure..............................	3,041	3,934	5,544	29.4	40.9
Total expenditure...............................	118,054	127,005	143,572	7.6	13.0

Expenditure on economic affairs rose by 6 per cent from last year with outlays for roads increasing 7.9 per cent. The agricultural support expenditures, which remain broadly unchanged between years, are in accordance with an agreement between the Government and the Farmers' Union, and road construction, the mainstay of communications expenditures, follows a four-year programme for this activity.

As noted earlier, interest payments increase by 4.9 billion krónur between the years, considerably in excess of budget assumptions, which is mostly due to repayments of domestic debt 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 1.6 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. Incoming repayments of outstanding loans exceeded new loans by 1 billion krónur, compared with 2.5 billion a year ago. Credit from the Treasury is no longer a significant item, since such transactions have declined in recent years. Payments over short-term accounts amounted to 5.1 billion and extraordinary contributions to the Government Employees Pension Fund towards future pension commitments amount to a total of 4.5 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 28.8 billion, 10 billion more than last year. The most important part of these were repayments were domestic government bonds redeemed before maturity of 9 billion krónur, double that of last year. The repayments were directed at four small bond issues which 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 21.5 billion, about 13 billion more than last year. Of the total this year, 18.5 billion was borrowed abroad and 3 billion at home. In February, the Treasury floated a foreign bond issue of 200 million Euros, the domestic proceeds of which amounted to 14S billion krónur. The proceeds were used to repay other foreign debt before maturity. Treasury bills outstanding declined by 1 billion in the first nine months of 2000, compared with a 4 billion decline a year ago. Sales of domestic government bonds and medium-term notes amounts to 4 billion this year compared to 2.9 billion last year.