Weekly Web Release from the Ministry of Finance, September 26, 2002.

Weekly Web Release from the Ministry of Finance
September 26, 2002

New national economic forecast
The fiscal budget for 2003 will be presented on Tuesday October 1st to the Althingi. The budget is based upon the national economic forecast of the Ministry of Finance, taking over the work previously done by the National Economic Institute as of July 1st 2002.

Coverage and analysis of economic issues has gone through massive changes in recent years, with the addition of analyst departments of major banks, financial institutions as well as economic departments of employers and union associations. This is a well received and necessary supplement to the more traditional public sector discussion of economic forecasts, adding to a further exchange of opinions as well as an enhanced understanding of the economy. Therefore, the new forecast presented by the Agricultural Bank of Iceland presented earlier this week was a welcome contribution in this field, adding to the professional economic analysis and discussion of recent years.

Measurement of public healthcare expenditure
Since the article published on August 30th relating to public health expenditure within the OECD, there has been some discussion with regards to the measurement and accuracy of these figures. It is a difficult process to measure these public expenditures between countries, but the figures published last week are based on the OECD healthcare database which is considered quite accurate.

In the comparison published by the Ministry of Finance, calculations are based on data relating to average expenditure of individuals measured in US dollars on a purchasing power parity basis which takes account of price differentials, and fluctuations in exchange rates should therefore not have a significant impact upon the comparison.

According to OECD figures, public healthcare expenditure as a proportion of GDP is 7.5 per cent in Iceland, second highest on the list after Germany with 8 per cent. total healthcare expenditure as proportion of GDP puts Iceland in sixth place.

Some reservations are in order when considering these figures. GDP can fluctuate considerably. A sharp increase GDP would cause the healthcare/GDP ratio to decline although healthcare expenditures have not. Conversely, a decline in GDP with healthcare expenditures remaining constant would increase this ratio, although no increase in healthcare outlays have taken place.

Much suggests that using the PPP measurement provides a better comparative analysis in expenditure per capita in international comparison.

Treasury accounts 2001
The Treasury accounts for 2001 has now been published. The accounts are on an accruals basis and are therefore not comparable to the monthly cash-based accounts. The revenue surplus amounted to 8.6 billion kronur a 12.6 billion kronur improvement from the year 2000. The improved Treasury account for 2001 is mainly due to two factors: reduced expensing of pension fund commitments and the reduction in tax claim write-offs. The revenue surplus of 2001 is equivalent to 1.2 per cent of GDP. The fiscal budget estimated a 33.9 billion kronur surplus, the difference mainly due to a much lower profit from asset sales than expected since the sale of the government-owned telephone company and its banks could not be implemented in the course of the year.

Total revenue amounted to 237.4 billion kronur in 2001, or 31.6 per cent of GDP that year, compared with the previous year when total revenue reached 224.7 billion kronur, or 33.7 per cent of GDP. A turnaround in the economy in 2001 had a major impact on the Treasury accounts. Instead of the upswing of the previous 3-4 years, there was a contraction in domestic demand, which led to a reduction in revenue.

Total expenditures amounted to 228.7 billion kronur in 2001, or 30.5 per cent of GDP, compared with 229 billion kronur or 34.3 per cent of GDP the previous year. The expenditure therefore remains the same between the years in kronur terms, which is a contraction by 8.4 per cent in real terms, as measured by the GDP deflator. Five years have passed since Treasury expenditure declined in nominal terms between years.

Taxation of EU companies
As discussed in the weekly web release dated April 4th 2002, the European Commission has set the objective for Europe to become the most competitive and dynamic economy in the world.

In a recent report from the European Economic and Social Committee – EESC, "Opinon on direct company taxation", the committee supports the Council's suggestions to reduce the dual taxation of companies as well as plans to solve problems related to the evaluation of related businesses. This is however not sufficient to erase the hindrance created by different tax policies within the internal market. Therefore it is imperative to find an effective solution as soon as possible. The report supports the suggestion of a uniform nominal tax rate for corporations within the EU. However, this should not be limited only to companies with operations in more that one member country, as this could lead to an unfair tax discrimination for companies.

The EESC suggests a trial of allowing limited liability companies with operations within the European Economic Area to draw up their accounts according to a uniform tax base without upsetting the competitive position of other companies.

Tax issues are generally a very sensitive subject within the EU and the member states place great emphasis on having as much discretion as possible. The EESC does not see this as a challenge to the uniform nominal tax rate, as the European Commission suggests the member states arriving at the nominal tax rate themselves. This would also facilitate the task of interest groups to provide authorities in member states with the appropriate co-operation if the regulations are more transparent.

In spite of the total support of the EESC, it is clear that there is a long way to go until EU companies agree on a uniform nominal tax rate. Opinions are very varied between EU member states, and rules relating to such tax rates are dependent upon agreement of all EU members. As this is an issue that can affect the operational conditions of companies, it is only right to closely follow future discussions relating to this issue.


For comments and/or suggestions, send e-mail to:
"bolli.thor.bollason@fjr.stjr.is"
or contact the Ministry of Finance,
Weekly Web Release, Arnarhvoll, 150 Reykjavik, Iceland