Weekly Web Release from the Ministry of Finance, November 21, 2002.
Weekly Web Release from the Ministry of Finance November 21, 2002
12-month change, 6-month moving average at constant prices
Treasury finances January-October 2002
Figures for Treasury finances for the first ten months of 2002 are now available. They are on a cash basis and therefore not comparable to the Treasury accounts or the fiscal budget, both of which are presented on an accruals basis.
The cash deficit from operations amounted to 14.4 billion krónur, compared to a deficit of 1.2 billion krónur at the end of October 2001. This was mostly foreseen in the cash budget projection, which estimated the cash deficit at 10.8 billion krónur, the difference being solely accounted for by lower income from the sale of assets than estimated.
Total revenue amounted to 191 billion krónur, an increase of 9.5 billion krónur or 5 per cent from last year. Tax revenue increased less, by 3.3 per cent. The difference stems entirely from increased revenue through the sale of assets during this period. At the same time the consumer price index rose by 5.8 per cent and the wage index by 7.5 per cent. This reflects that Treasury tax revenue is still contracting in real terms, as is the case with overall national expenditure. The figures for the last several months show however that the contraction is receding, as can be discerned from the above graph.
The taxation of alcohol in the European Union
There has been some discussion recently in the Icelandic and Norwegian media that the EU is preparing legislation on the maximum taxation of alcohol within the EU. This has prompted a discussion of the direct and indirect effects upon Iceland and Norway, due to the association of these countries with the EU through the European Economic Agreement (EEA).
At this time a Directive is in effect which calls for minimum taxes on alcoholic beverages, depending on the type. The Directive calls for a specific tax amount rather than an ad valorem tax. This amount has not been amended for several years and is thus not of significance in the taxation of alcoholic beverages. The Directive does not call for a maximum of alcoholic taxation. A maximum alcohol tax is under consideration in the EU Commission, partially with the aim of stimulating commerce in alcoholic beverages within the EU. A report from the Commission is not expected until sometime next year, either in the form of a report or a proposal to the EU Council to issue a Directive in the matter. The Commission has prepared an extensive report on the taxation of alcohol and the competition between individual alcoholic beverages which can be obtained from the EU's website or by clicking here.
The above Directive and the ideas under discussion are based on Article 93 of the Rome Treaty, which deals with the authority of the EU Council to establish rules on turnover and excise taxes as well as other indirect taxes in order to ensure the functioning of the internal market of the EU. It is stipulated that all the member countries agree to the imposition of such rules. This is one of the issues related to the co-ordination of indirect taxes within the EU, which is not a part of the European Economic Agreement.
Should the EU impose co-ordinated rules on the taxation of alcohol it would undoubtedly influence the discussion of alcohol taxation in this country. The EEA does not, however, commit the Icelandic authorities to amend their alcohol taxation régime in conformity with EU Directives.
New OECD forecast for Iceland
The OECD has come out with a new forecast for its member countries for the years 2002-2004. Its forecast for Iceland is basically identical with the forecast of the Ministry published earlier this autumn. The forecast predicts that there will be no growth in 2002 but that growth would resume in 2003 at a 1x per cent rate, slightly higher than the Ministry predicted. For 2004, a growth rate of close to 4 per cent is predicted on the assumption that hydropower and aluminium plant investments will be then have commenced. The inflation forecast of the OECD is for that reason also somewhat higher than the Ministry's forecast, and the OECD also predicts that unemployment will be somewhat higher than was forecast by the Ministry. The OECD assumes that interest rates may continue to decline over the next several months but would again rise if power investments take place in 2004. Public finances are expected to be in balance for the forecast period, whereas the current account is expected to be in slight deficit in 2004 on account of power investments.
The OECD forecast on Iceland
| Volume changes, % | 2002 | 2003 | 2004 |
| Private consumption | -1.0 | 1.2 | 2.3 |
| Public consumption | 3.0 | 2.0 | 3.1 |
| Gross fixed capital formation | -14.6 | 2.1 | 13.0 |
| Final domestic demand | -3.3 | 1.5 | 4.6 |
| Exports of goods and services | 5.0 | 4.2 | 5.5 |
| Imports of goods and services | -3.0 | 4.0 | 8.0 |
| GDP at market prices | 0.0 | 1.7 | 3.7 |
| Consumer price index, % | 5.2 | 2.8 | 2.8 |
| Unemployment rate, % of labour force | 2.8 | 2.8 | 2.3 |
| General government financial balance, % of GDP | 0.3 | 0.0 | 0.3 |
| Current account balance, % of GDP | -0.1 | -0.2 | -1.2 |
Regarding international economic developments, the main conclusion of the OECD forecast is that the resumption of growth in the international economy will be slow. Things looked promising at the beginning of this year but a setback in the United States since then has slowed down the pace of recovery. Consumer and business confidence has suffered in the wake of a series of business corruption episodes and bankruptcies, a continued downslide in stock prices and uncertainty in the Middle East.
Most economic forecasts have been scaled down for 2002 and 2003. This is particularly true of the EU countries where 1 per cent growth is predicted for this year and close to 2 per cent for next year. Unemployment is expected to increase from 7S per cent this year to close to 8 per cent in 2003. Inflation is forecast to decline slightly, from 2S per cent in 2002 to 2R per cent in 2003. The OECD warns of public sector deficits that could reach 2 per cent of GDP in each of the next two years, assuming that policies remain unchanged.
The position of the United States is thought to be stronger. Economic growth is predicted at 2S per cent, both in 2002 and 2003 and at 3S per cent in 2004. Inflation is expected to be less than 2 per cent for this entire period. Unemployment, however, could increase to a level of 6 per cent over this entire three-year period. Public finances, however, have deteriorated, and a public sector deficit of 3 per cent of GDP is predicted for the 2002-2004 period.
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