2 0

0 5

The fiscal budget proposal for 2005

October 1st 2004

2 0

0 5 The 2005 revenue surplus is estimated at

11.2 billion krónur, 1.2 per cent of GDP

Highlights of the 2005 budget

The 2005 financial surplus estimated at 4 billion krónur

2 0

0 5

Treasury finances

Billion krónurAccounts

2003Budget2004

Estimate2004

Budget2005

Revenue ......................................... 273.9 282.0 290.2 305.8

Expenditure ................................... 280.0 275.3 282.4 294.6

Revenue balance ......................... -6.1 6.7 7.8 11.2

Financial balance ...................... 15.3 14.0 16.9 4.0

2 0

0 5

Revenue balance, excluding irregular items

Revenue balance ............................. -6.1 6.7 7.8 11.2

Irregular expenditure ......................... 14.4 8.7 8.7 8.8

Irregular revenue ................................ 9.9 0.1 0.1 0.1

Rev. bal. excl. irreg. items ............. -1.6 15.3 16.4 19.9

2 0

0 5 • The revenue balance increases by 3.4

billion from 2004 and by 17.4 billion from 2003

• This reflects a tighter fiscal policy

Stronger fiscal finances

2 0

0 5 • The Government’s Medium Term

Programme calls for a further tight fiscal policy in 2006-2008

• Public consumption to increase by 2 per cent a year in real terms and transfer payments by 2½ per cent a year

Tight fiscal policy in 2006-2008

2 0

0 5

Investment declines 2005-2006 and increases 2007-2008

• Investment will be cut by 2 billion in 2005 and again by 2 billion in 2006...

• to be increased again by 2 billion in 2007 and 2 billion in 2008

2 0

0 5

Room for tax cuts

• Increased expenditure restraint and a rising revenue surplus creates room for significant tax cuts in 2005-2007...

• ...for the benefit of households

• A logical continuation of earlier tax cuts

2 0

0 5

Continued economic stability

• ...without endangering economic stability, according to the projections of the Ministry of Finance

• The fact that Treasury expenditure remains unchanged in 2005 and decline by 1.4 per cent in relation to GDP reflects the tightness of fiscal policy

2 0

0 5 30.41

25.75

21.75

0

5

10

15

20

25

30

35

1997 2004 2007

%

The personal income tax

2 0

0 5

1.5

0.6

0.00

1

2

2001 2002 2007

%

The personal net wealth tax

2 0

0 5 7.0

5.0

4.0

2.0

0.00

1

2

3

4

5

6

7

8

2002 2003 2004 2005 2006

%

The personal income surtax

2 0

0 5

Main economic assumptions 2005

2 0

0 5 • Economic growth 5%

• Rise in real disposable incomes 3¼%

• Inflation 3½%

• Unemployment 2¾%

• Current account deficit 11% of GDP

• Exchange rate index 125

2 0

0 5

-1

0

1

2

3

4

5

6

%

Strong economic growth

2 0

0 5

Price stability

%

0

1

2

3

4

5

6

7

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

2 0

0 5

90100110120130140150

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Increasing real disposable incomes

2 0

0 5

Low unemployment

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

OECD

Iceland

2 0

0 5

Temporary increase in the current account deficit

-16

-14

-12

-10

-8-6

-4

-2

0

2% of GDP

2 0

0 5

Highlights of the budget

2 0

0 5

29.129.6

31.0

32.8

31.2

29.9

25

26

27

28

29

30

31

32

33

34

2000 2001 2002 2003 2004 2005

% of GDP

Treasury expenditure declines* in relation to GDP

* Excl. irregular items

2 0

0 5 30.3

28.5 28.3

29.530.2

29.4

25

26

27

28

29

30

31

2000 2001 2002 2003 2004 2005

% of GDP

Tax revenue declines in relation to GDP

2 0

0 5

Priority in expenditures

• Expenditure on education increases 8.8 per cent

• Special increase in development aid

• Expenditure on law enforcement and security increases by 5.4 per cent

• Increase in housing space for the disabled and in nursing homes

2 0

0 5

Special expenditure measures

• Expenditure cut by 800 million through a 1 per cent cost-efficiency demand upon government agencies

• Investment is cut by 2 billion

2 0

0 5

Special revenue measures

• The personal income tax rate will be cut by 1 per cent, from 25.75 to 24.75 per cent

• The personal income surtax declines from 4 per cent to 2 per cent

• Various user charges will increase in line with general prices

2 0

0 5

Looking ahead

• A ministerial committee will conduct a review of government agencies

– The aim is to increase efficiency and improve services

• A special effort will be made to outsource government tasks

• Transfer payments will be reviewed in order to reduce the automatic rise in expenditure

2 0

0 5

What has been achieved in recent years?

2 0

0 5

Treasury debt has declined by half since 1995...

0

10

20

30

40

50

60

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

% of GDP

Total debt

Net debt

2 0

0 5

...which has led to an 11 billion reduction in interest payments

1,91,7

2,12,42,3

2,5

1,6

0,0

0,5

1,0

1,5

2,0

2,5

3,0

1999 2000 2001 2002 2003 2004 2005

% VLF.

2 0

0 5

Prepayments against pension fund commitments have amounted to 79 billion since 1999

7.917.3

34.0

45.2

78,871,2

60,7

0

10

20

30

40

50

60

70

80

1999 2000 2001 2002 2003 2004 2005

Bn.kr.

Reiknaðir vextir 5% árin 2004 og 2005

2 0

0 5

Social security and social assistance payments

19.2 21.024.1 25.3

28.433.2

36.6 38.0

0

5

10

15

20

25

30

35

40

1998 1999 2000 2001 2002 2003 2004 2005

Bn.kr.

2 0

0 5

Disability pensions

4.9 5.77.5 7.6

9.0

11.313.2

14.3

0

2

4

6

8

10

12

14

16

1998 1999 2000 2001 2002 2003 2004 2005

Bn.kr.

2 0

0 5

0

5

10

15

20

25

1998 1999 2000 2001 2002 2003 2004 2005

Universities Other higher education

Bn. kr.

Expenditure on research, universities and other higher education

11,9 13,414

15,719

21,2 21,5 24

2 0

0 5

In summary

• Improved Teasury finances have led to declining debt and lower interest payments

• Sharply increased fiscal restraint to offset the impact of power project construction

• A significant Treasury surplus, partly due to expenditure restraint, will create room for tax cuts in 2005-2007

• A review of government operations will be launched

2 0

0 5

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