Treasury finances in January - November 2000. Report date: December 21, 2000.

Figures are now available for Treasury finances for the first eleven 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 net revenue surplus of the Treasury amounted to 9 billion krónur in the first eleven months of this year. The result so far this year is about 5 billion krónur more favourable than had been projected. The revenue surplus in the first eleven months of 1999 amounted to just over 16 billion krónur. The reason for the reduced surplus compared to last year is that interest expenditures on a cash basis have increased by close to 5 billion krónur, mainly due to a prepayment of domestic government bonds this year. These are all zero-coupon bonds with interest due at the time of repayment. Revenue from asset sales are 6 billion krónur lower this year than last which also explains a substantially lower net financial surplus this year. Repayments of outstanding debt amounted to 34.4 billion krónur and new borrowing to 27.8 billion. The overall balance was in deficit by 3 billion, about 1 billion less than last year.



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

	1998	1999	2000
Revenue.................................................................	145,011	173,494	184,588
Expenditure............................................................	142,624	157,214	175,616
Revenue balance.............................……….........	2,387	16,279	8,972
Sundry capital transactions, net.......................	3,753	5,433	200
Net financial balance…….................................	6,140	21,712	9,172
o.w.: Pension fund prepayments…...................	-	-4,500	-5,500
Debt redemption................................................	-25,245	-34,102	-34,443
Domestic….......................................................	-15,431	-17,321	-20,909
Foreign..............................................................	-9,814	-16,781	-13,534
Gross borrowing requirement.........................	-19,105	-16,890	-30,771
New borrowing...................................................	19,268	13,117	27,793
Domestic….......................................................	19,976	-2,577	6,062
Foreign..............................................................	-708	15,694	21,731
Overall cash balance………..............................	163	-3,773	-2,978

In comparing monthly figures it should be noted 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 of the Treasury amounted to 184S billion krónur in the first eleven months of the year, compared to 173S billion and 145 billion in the corresponding periods of 1999 and 1998, respectively. The increase between 1999 and 2000 amounts to only 6S per cent as against 19S per cent a year earlier. The change in total tax revenue is similar; the increase amounts to 10S per cent this year and 15S per cent last year. These developments reinforce the already established trend that the rise in domestic demand and spending in the economy is slowing down. Last year, there was a considerable expansion in domestic demand which was reflected in a sharp increase in consumer imports. This situation has been sharply reversed. Imports increased by 15 billion krónur in the first ten months of this year of which half a billion krónur or 5 per cent consists of consumer imports. The remainder are investment and production input goods, particularly oil.



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

				Increase	in %
	1998	1999	2000	1998-1999	1999-2000
Total tax revenue...............................	134,143	155,029	171,657	15.6	10.7
Taxes on income and profit..............	35,160	41,780	49,656	18.8	18.9
Personal income tax…......................	27,637	32,479	37,610	17.5	15.8
Corporate income tax.......................	4,954	6,421	6,504	29.6	1.3
Other taxes on income and profit…	2,569	2,880	5,542	12.1	92.4
Social security taxes..........................	14,479	15,880	17,324	9.7	9.1
Net wealth taxes................................	6,714	7,192	8,453	7.1	17.2
Taxes on goods and services............	77,595	89,897	95,878	15.9	6.7
Value added tax ............................	47,401	55,663	60,993	17.4	9.6
Other indirect taxes.........................	30,193	34,234	34,175	13.4	-0.3
Of which:
Excise tax on motor vehicles…..	4,365	5,352	4,746	22.6	-11.3
Excise tax on petrol……………	6,280	6,687	6,983	6.5	4.4
Diesel weight tax………………	3,365	3,853	4,415	14.5	14.6
Tobacco and liquor taxes……..	6,901	7,524	7,956	9.0	5.7
Other indirect taxes..................	9,282	10,818	10,785	16.5	-6.9
Other taxes........................................	280	692	345	147.1	-50.1
Other revenue...................................	10,869	18,464	11,832	70.0	-64.1
Total revenue....................................	145,011	173,493	184,588	19.6	6.4

Although the rise in tax revenue is generally lower this year than last, there is a considerable disparity in the development of individual taxes. Direct taxes are increasing far more rapidly than indirect taxes, or close to 19 per cent as against 7 per cent. The rapid growth of direct taxes is to a substantial extent due to the 92 per cent increase in revenue from the capital income tax. Revenue from the personal income tax also rose considerably, or close to 16 per cent, compared to 17S per cent last year. This compares to a 6S per cent increase in the wage index in the first eleven months of the year, 7 per cent in the corresponding period last year and 9S per cent in 1998. This is furthermore reflected in revenue from the social security tax, although there the increase is less than in the case of the personal income tax. The recent annual corporate tax assessment, released in November, indicates that assessed revenue from this tax is lower than had been projected so that collection from this tax is broadly unchanged from the previous year.

The increase in indirect taxes so far this year corresponds to a 1S-2 per cent increase in real terms, representing a reversal of the trend a year ago when the increase amounted to 14-15 per cent in real terms. Revenue from the value added tax has increased by close to 7 per cent in nominal terms this year, about half of last year's increase. This shows clearly the reduced demand expansion in recent months.

There is considerable disparity in the development of the various excise taxes in the course of this year. The excise duty on new motor vehicles rose by 23 per cent last year, followed by an 11 per cent decline this year, reflecting a 10 per cent decline in the number of imported vehicles and also a reduction in the excise duty on large private passenger vehicles this past spring. However, the value of car imports has declined by only 4 per cent in the first eleven months of this year compared with last year.

Revenue from petrol taxes have increased by 4.5 per cent this year at the same time as the import price of petrol has nearly doubled from last year. The low rise this year is due to the fact that the ad valorem part of the petrol tax was changed to a fixed duty in November of last year. This has meant that petrol prices at the pump are now 12-13 krónur lower than they would have been under the previous arrangement.

The weight tax on diesel motor vehicles increased by 14S per cent in the first eleven months of the year, a similar increase as in 1999. It should be noted in this connection that the weight tax was amended last spring. The subsequent increase in the number of diesel vehicles and increased driving have together led to an unexpected increase in revenue from the weight tax. For this reason, it has recently been decided to reduce the weight tax on diesel vehicles by 10 per cent as of the next payment period.

Other revenue, which covers dividends, interest income and profits from asset sales, has declined sharply from last year, wholly due to the fact that sales of government assets in 2000 are far below those of last year. The 2000 budget projected that current revenue from asset sales would amount to 4.2 billion krónur. The 2000 supplementary budget, passed in mid-December of this year, projects that this amount will decline to 0.8 billion krónur due to the fact that the projected privatisation of the government-owned commercial banks will be delayed until next year.

Expenditure
Total expenditure of the Treasury amounted to 175S billion krónur in the first eleven months, an increase of 18S billion or close to 11S per cent over the first eleven months of 1999. About 5 billion of this increase is due to increased interest payments, mainly due to prepayment of government debt with accumulated interest. Excluding interest, the expenditure increase amounts to 8S per cent, about 2 per cent less than the projected increase in national expenditure and about 1S per cent less than last year.

Administrative expenditures cover the administration of the central government, justice, law enforce-ment and the foreign service. These have increased by 13 per cent between the first eleven 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 rose by 8 per cent between the two years; where a drop in investment offsets rising current expenditures.

About two-thirds of expenditure, just over 109 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 9S per cent whereas individual expenditure items differ widely. Outlays for hospital costs, old age care and sickness insurance increase by nearly 13 per cent whereas other transfer payments, such as social security entitlement benefits, increase by close to 8S per cent. Such benefits increase in concert with general wage rates, but the rise is mitigated by the linkage of benefits to other incomes. By comparison the wage rate index rose by 6S per cent during the same period.

Expenditure on economic affairs rose by 4S per cent from last year with outlays for roads increasing by 8 per cent, whereas outlays for harbour construction has declined. The agricultural support expenditures, which remain broadly unchanged between years, are in accordance with an agreement between the Government and the Farmers' Union. Direct support payments to farmers increase by 3.2 per cent whereas payments to the State Land Fund decline. Road construction, the mainstay of communications expenditures, follows a four-year programme for this activity.




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

				Change	in %
	1998	1999	2000	1998-1999	1999-2000
Administration....................................	15,868	18,035	20,381	13.7	13.0
General administration.......................	7,444	9,058	10,433	21.7	15.2
Justice and law enforcement…..........	5,989	6,377	7,120	6.5	11.7
The foreign service...........................	2,435	2,599	2,817	6.7	8.4
Social affairs.......................................	90,973	99,130	108,521	9.0	9.5
Of which: Education and culture.........	16,559	18,170	19,620	9.7	8.0
Health........................................	27,485	30,940	34,932	12.6	12.9
Social security............................	35,874	38,480	41,795	7.3	8.6
Other social expenditure............	8,897	9,066	9,470	1.9	4.5
Economic affairs..................................	20,290	23,071	24,137	13.7	4.6
Of which: Agriculture.. ........................	7,362	7,940	8,114	7.9	2.2
Communications........................	9,517	11,244	11,993	18.1	6.7
Interest expenditure...........................	11,666	10,945	15,804	-6.2	44.4
Other expenditure..............................	3,827	6,033	6,773	57.6	12.3
Total expenditure...............................	142,624	157,214	175,616	10.2	11.7

As noted earlier, interest payments increase by close to 5 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 increased by 700 million krónur which is mainly due to a 500 million krónur increase in appropriations to several environmental projects.

Capital transactions
The "Sundry capital transactions" item 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 1.3 billion krónur, compared with 2.9 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 6.4 billion and extraordinary contributions to the Government Employees Pension Fund towards future pension commitments amount to a total of 5S billion, compared with 4S billion last year. 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 34S billion, about the same as last year. The most important part of these were 10S billion krónur of domestic government bonds redeemed before maturity. The redemption was directed at four small bond issues which traded thinly in the secondary market. Repayments of foreign debt amounted to 13.5 billion, 3.3 billion less than last year.

Treasury borrowing amounted to 27.8 billion, 14.7 billion more than last year. Of the total this year, 21.7 billion were borrowed abroad and 6.9 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. In addition, 7 billion were borrowed abroad in the Euro-commercial paper market to meet short-term financing requirements. Treasury bills outstanding decreased by about one billion, compared with a 6 billion decline a year ago. Sales of domestic government bonds and medium-term notes amounted to 6.9 billion this year compared to 3.7 billion last year.

Recently, an agreement was concluded with three financial institutions on making markets in Treasury bills. These market makers have the exclusive right to bid for Treasury bills, and at the same time they are appointed as the principal market makers in Treasury bills. The purpose of the agreement is to ensure the issue of Treasury bills and strengthen their position in the secondary market. The Treasury commits itself to issue 3-4 billion krónur in three tenders. An increase in outstanding Treasury bills of 4-6 billion krónur is projected to take place in the course of next year.