Treasury Budget proposal 2014

The Treasury Budget proposal for 2014 provides balanced Treasury operations for the first time since 2007. Stopping debt accumulation and achieving balanced public sector finances are the foundations of resilience.

The key objective of the budget proposal is to ensure improved living conditions for the people of Iceland. Real disposable income will rise by 0.3% in 2014 as a result of lower taxes. In addition, pensioners will benefit from increased social security system expenditures.

Over the next three years, the payroll tax will decline by 0.34 percentage points, providing firms with relief in the amount of ISK 3.8 bn by the time the changes have been implemented in full. In the long run, the payroll tax reduction will be of benefit to wage earners and will stimulate investment in the Icelandic economy.

The main element of fiscal policy is to reduce government debt, thereby reducing interest expense. The outlook is for a fiscal deficit of ISK 31.1 bn this year. This is substantially in excess of the estimate for 2013, which assumed a deficit of ISK 3.7 bn.

In the absence of targeted action, the fiscal deficit would have totalled some ISK 27 bn in 2014. Government expenditure will be reduced as a share of GDP through broad-based streamlining measures, decisions to abandon various recent projects undertaken by the previous government, and measures to cut interest expense.

Operating performance will also be improved through revenue-generating measures – in particular, the bank tax, which will be increased and will be imposed for the first time on financial undertakings in winding-up proceedings. Payments made by firms in winding-up proceedings will total an estimated ISK 11.3 bn in 2014, and total payments will amount to ISK 14.2 bn. This provides some scope for changes in focus, in line with the new government's policy.

Increased support for pensioners and safeguarding of children's benefits and interest cost rebates

• The budget proposal provides for ISK 5 bn in increased disbursements to recipients of old age and disability pensions and to social assistance programmes, due to various changes in these pensioners' entitlements.
• Social security system disbursements will increase by an additional ISK 3.4 bn next year because of an increased number of benefit recipients and indexation of benefits. Spending in this category will therefore rise by a total of ISK 8.4 bn.
• The increase in interest cost rebates for low-income homebuyers, which was due to expire at the end of the year, will be extended.
• The recent increase in children's benefits is protected, in line with the government's policy of supporting families with children. Children's benefits rose by 24% in the 2013 Treasury Budget. Total expenditures for children's benefits are estimated at ISK 10.2 bn in 2014, as opposed to just under ISK 7.5 bn in 2012.

First steps away from increased taxation on individuals and companies

• The tax rate in the middle income tax bracket will be reduced by 0.8%, bringing it closer to the lowest bracket.
• The combined percentage of employers' payroll tax and Wage Guarantee Fund contributions will decline by 0.1 percentage points. It will be cut by an additional 0.1% in 2015 and another 0.14% in 2016.
• The tax-free threshold for financial income tax on individuals' interest income will be raised by 25%, from ISK 100,000 to ISK 125,000.
• Value-added tax on disposable paper diapers will be reduced from the general rate of 25.5% to the lowest rate, 7.0%.

Further measures to assist households

• The ceiling for maternity/paternity payments leave will be raised to ISK 370,000, but plans to lengthen maternity/paternity leave will be abandoned.
• The “Allir Vinna” programme providing for reimbursement of value-added tax on labour related to construction and renovation of residential, vacation, and municipality-owned housing, which was due to expire at year-end 2013, will be extended.
• The tax-free threshold for children's income will be raised from ISK 104,745 to ISK 180,000.
• Stamp fees on loan documents will be cancelled.

Contributions to various investment projects

• Norðfjarðargöng tunnel
• Bakki investment in infrastructure and road construction
• Vaðlaheiðargöng tunnel
• Prison construction at Hólmsheiði
• General transport construction projects

Highlights of Treasury Budget proposal for 2014

Overall and primary Treasury balance

Total expenditure is estimated at ISK 587.1 bn according to the budget proposal, a negligible increase of ISK 0.4 bn from estimated year-2013 results. Primary expenditure will rise by ISK 1.5 bn year-on-year, however. The difference is due to reduced Treasury interest expense in the amount of ISK 1.2 bn, based on estimated year-2013 results.

Total Treasury revenues for 2014 are estimated at ISK 587.6 bn, an increase of ISK 31.9 bn from the revised estimate for 2013.

Accompanying the fiscal budget proposal are plans for decisive measures to reduce Treasury debt accumulation substantially and turn the deficit into a surplus after six consecutive years of deficit operations.

Measures on the revenue side will generate an additional ISK 7 bn for the Treasury in 2014

• Increase and expansion of bank tax. The tax will be increased from 0.041% to 0.145% and will also be levied on legal entities in winding-up proceedings. Treasury revenues are estimated to rise by ISK 14.2 bn as a result.
• The general financial administration tax on financial institutions will be reduced from 6.75% to 4.5%. Treasury revenues will decline by ISK 1.1 bn.
• The middle income tax bracket for individuals will decline from 25.8% to 25%. The direct effect on Treasury revenues will be ISK 5 bn.
• It is also planned to reduce the combined percentage of the payroll tax and the contribution to the Wage Guarantee Fund by 0.1 percentage points. The direct impact of this will be ISK 1 bn in 2014.

Various measures on the expenditures side of the proposal

• Recent or unexecuted projects will be abandoned in the amount of ISK 5.8 bn.
• Turnover-based consolidated measures affecting ministries will be reduced by ISK 3.6 bn.
• Various specific consolidation measures will reduce expenditures by ISK 2.6 bn.
• The Treasury's interest expense will be reduced with a review of the terms of the bond issued to recapitalise the Central Bank of Iceland following the collapse of the banks. The balance of the bond was ISK 170 bn as of end-2012. Treasury interest expense will be reduced by ISK 10.7 bn in comparison with the estimate according to the 2013 Treasury Budget.

These measures combined will reduce Treasury expenditure by ISK 23 bn.

The above-described measures and estimates for the year-2014 fiscal budget proposal could produce a primary surplus of ISK 0.5 bn on an accrual basis. If the proposal is passed as is by Parliament, the Treasury Budget for 2014 will be Iceland's first balanced budget in six years. Achieving balanced public sector finances promotes increased output growth and lower domestic interest rates, which will strengthen households and firms alike.

Treasury debt is too high. It will total ISK 1,500 bn, or 84% of GDP, at the end of 2013.
Pension obligations for government employees amount to ISK 390 bn, and a plan for meeting that expense must be put into place. In addition, government guarantees for the Housing Financing Fund total ISK 940 bn. Interest expense, estimated at ISK 85 bn according to the Treasury Budget for 2013, is too high.

The 2014 fiscal budget proposal assumes that the automatic debt accumulation stemming from deficit operations will be stopped. The debt level will not rise in real terms next year, and as a share of GDP it will fall from 84% to 80%.

The cornerstone of the government's fiscal policy is the responsible handling of public sector finances, with long-term prudence and sensible utilisation of the nation's collective financial resources as a guiding principle.

In the report accompanying the budget proposal is a revised and updated plan fiscal plan for the next four years. Furthermore, it should be noted that all budget proposal materials, summaries of figures, and reports are published on the Ministry of Finance and Economic Affairs website as soon as the proposal has been presented before Parliament. The website address is: www.fjarlog.is (http://www.fjarlog.is).

It should also be noted that the national economic forecast will be presented in mid-October.

Further information can be obtained from Elva Björk Sverrisdóttir, Information Officer of the Ministry of Finance and Economic Affairs, at tel: +354 545-9200.