Excerpts from the Ministry's Weekly Web Release February 14, 2002.

Will the red line be crossed in May?
A 0.3% reduction in the consumer price index from January till February encourages the view that inflation is abating. The government's decision to withdraw a considerable portion of its increase in public service charges that became effective at the beginning of the year accounts for half of the reduction. Pressure from the Federation of Labour has also, without doubt, served to counteract the price increases of various entities. Most importantly, the level of the February consumer price index, at 220.9, makes it more likely that the so-called red line of 222.5 will not be crossed in May, and that therefore, the revision clause in the current wage agreements will not be invoked.

This has a direct and positive impact on the economy. Businessmen are likely to be more optimistic that ahead lies increased economic stability, which in turn has a positive impact on proposed investments and company finances. The same applies to individuals. In addition, the effect is expected to strengthen the krona, but this requires additional support such as a continuing shrinkage of the current account deficit and a better access to its financing. At the present time, indications are that the currency is getting stronger, and the same opinion is expressed in a recent report by the Central Bank.

The Ministry of Finance believes it highly likely that the red line will not be crossed in May. Much will depend on how the exchange rate will develop and how the strengthening of the exchange rate in recent weeks will show up in prices. According to the Ministry's projection, the CPI is expected to increase by close to 3% within the year, based on an unchanged exchange rate. This increase is similar to that in the Central Bank's latest projection.

Treasury finances in 2001
Preliminary figures for Treasury finances for 2001 are now available. They are presented on a cash basis and are therefore not comparable to the Treasury accounts or the fiscal budget, both of which are presented on an accruals basis.

The Treasury's total revenue amounted to 220.9 billion kronur in 2001, or 6.4 billion kronur below the estimate made at the time of the presentation of the supplementary budget in October 2001. This is for the most part attributable to the fact that plans of asset sales did not materialise before the end of the year. Furthermore, taxes on income and profit generated less revenue than expected. Total expenditure amounted to 221.3 billion kronur in 2001, or 7 billion below the estimated figure. This is almost entirely attributable to less investment expenditure than estimated. The cash deficit from operations therefore amounted to 1S billion kronur which is a 4S billion better result than estimated in the supplementary budget.

The Treasury outcome in 2001is considerably below that achieved in 2000 due to the change in the economic environment in the course of 2001 which was reflected both in less revenue growth and increased expenditure due to rising inflation and a declining exchange rate. Total revenue increased by 13 billion kronur from last year, while expenditure increased by 26 billion. These developments reflect the change in economic conditions in the course of the year. The expansion of the past three to four years was succeeded by stagnation, particularly in domestic demand, which in turn meant a reduction in the Treasury's revenue growth. The change in tax revenue clearly reflects this turnaround. Tax revenue increased by 15% in 1999, 10% in 2000, whereas in 2001 the increase was down to 5%.

Almost two-thirds of the increase in Treasury expenditure last year is attributable to the impact of wage agreements, the development of the exchange rate and domestic inflation. Furthermore, payments to the newly created Childbirth Leave Fund, to the Municipal Equalisation Fund, a special payment to the disability pension scheme and payments for the purchase of farm production quotas are the largest other items of expenditure increase.

Insurance provided until the end of March
Althingi has agreed to extend until April 10th the government's permission to grant flight operators insurance cover against terrorism. The Minister of Finance has concluded a new reinsurance agreement with a consortium of Nordic flight insurance concerns that it provides to Icelandic flight operators. The agreement is valid until the end of March.

Double taxation treaty with Greenland
A double taxation treaty between Iceland and Greenland covering income tax and net wealth taxes was concluded on the February 7th and now awaits signing and ratification. The main content of the treaty is that a building site or supervisory activities constitutes a permanent establishment if its period of operation exceeds six months. Regarding the taxation of dividends it should be noted that dividends are deductible from company profits in Greenland, but the tax is paid when dividends are paid to shareholders. Therefore, Greenland could not accept Iceland's model draft regarding the taxation of dividends. It was decided that tax authorities in Greenland could retain a 35% withholding tax of the payment of dividends from companies in Greenland, the ratio corresponding to the income tax percentage of companies in Greenland. When paying dividends from Iceland to Greenland, it was decided to allow the levying of a 5% or 15% withholding tax depending on the recipient's shares in the company. Furthermore, the Contracting States may levy a 15% withholding tax on royalties, and pension payments may be taxed in the state of origin.


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"bolli.thor.bollason@fjr.stjr.is"
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Weekly Web Release, Arnarhvoll, 150 Reykjavik, Iceland