Excerpts from the Ministry's Weekly Web Release May 2, 2002.

Excerpts from the Ministry of Finance's Weekly Web Release
May 2, 2002

Positive economic outlook
Recent economic discussion has been characterised by good news, especially regarding the development of prices and exchange rate. Inflation has abated considerably in recent months, as is made evident by the fact that the annual rate of inflation has dropped below 4% based on price changes in the last six months. The corresponding inflation rate measured 11-12% not long ago. Inflation has therefore abated by about 1% a month in recent months. A stronger exchange rate is an important factor in this development that already has resulted in lower prices. Without doubt, the trend is set to continue. Furthermore, the government's decision to postpone a rise in service charges has resulted in lower inflation. The current outlook indicates that the May price goals, set by wage agreements, will be achieved. This is an important contribution to increased economic stability in the coming months.

A continuing recovery of the trade balance is yet another positive sign. Latest figures from Statistics Iceland confirm the improvement that has taken place in just one year. There was a 5.6 billion kronur trade surplus for the first three months of this year compared to an 8.2 billion kronur deficit in the same period last year, based on the corresponding exchange rate, a difference of almost 14 billion kronur. Furthermore, the figures indicate a continuing contraction in imports, both household consumption and corporate investment. The ongoing contraction in imports of motor vehicles is especially prominent - amounting to over one-third compared to the same period last year - this being the third year in a row where there is a contraction in motor vehicle imports.

Newly released figures confirm that the tension on the labour market has eased considerably. Even so, unemployment in Iceland is still among the lowest in the western world or around 2S% compared to 7S% in EU countries and 5S% in the other Nordic countries and the US. However, preliminary figures on the collection of VAT in April indicate some increase in imports from last year. Nevertheless, there is a 10% contraction in imports during the last three months based on a constant exchange rate and excluding ships and aircraft.

In light of the above, the Central Bank's decision to lower interest rates is perfectly valid, and if conditions remain stable, further interest rate reductions are to be expected.

A bill on diesel fuel tax and kilometre tax
Earlier this week, the Minister of Finance introduced in the Althingi a bill on diesel fuel tax and kilometre tax intended to replace the existing heavy vehicle tax. A bill proposing an increase in the special petrol tax and a corresponding decrease in the general petrol tax is introduced simultaneously. The latter proposal aims to secure unaltered revenue from sources of income earmarked for road construction. The diesel fuel tax would coordinate the taxing of diesel and petrol cars, as taxing would no longer be based on kilometres driven, but on the amount of fuel used. The diesel fuel tax will most likely be applied to more or less the same parties as the heavy vehicle tax. It is proposed that tax-free fuel be tinted or otherwise marked with additives. The former bill also proposes a special progressive kilometre tax on vehicles whose allowed weight exceeds 10 tons, except for vehicles intended for passenger transport. This means that the tax takes into consideration the cost derived from the wear of roads caused by the heaviest vehicles.

The bill aims, among other things, at encouraging the purchase and use of newer, more economical and more environmentally friendly vehicles. In addition, the change would establish a system much easier to implement than the current heavy vehicle tax, which has been the subject of increasing criticism in recent years. The bill is only introduced for discussion purposes in this parliamentary session. It will be reintroduced next autumn after the consideration of comments from interested parties.

The European Commission's Pension Forum
The European Commission recently held the fifth meeting of its Pension Forum where Iceland has an observing membership. The main emphasis was placed on the transfer of pension rights between EU member countries and a proposal for an EU Directive on occupational pension funds. Pan-European rules on occupational pension funds are believed to be one of the preconditions for increased mobility of labour within Europe. A group of specialists within the Forum concluded that it was important to set rules that enable the transfer of pension rights in occupational pension funds between countries. In the opinion of the group, transference should not be mandatory, but individuals should be given the option of an ongoing membership in funds where earned pension rights would be reserved. It was also considered important to abolish tax obstacles to the transfer of pension rights. The group emphasised the importance of providing fund members with sufficient information on which to base their decision of transference.



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Weekly Web Release, Arnarhvoll, 150 Reykjavik, Iceland