Treasury Budget Proposal 2015

The fiscal budget proposal for 2015 has been submitted to Parliament. It provides for a balanced budget for the second year in a row, with a surplus of ISK 4.1bn for the year. Stability and growth in support of responsible economic policy is the core concept behind the Government's medium-term fiscal plan. In this environment of prudent fiscal policy, the social welfare system will be supported with increased allocations to social security functions. 


The aim of the 2015 budget proposal is to ensure continuing economic stability and fiscal equilibrium at a time of rising disposable household income. In order to support price stability, there will be no indexation increases in nominal rates for quantity-based excises for 2015. 

The accumulation of Treasury debt has been stopped, thereby paving the way for reduced taxes on households and businesses and deleveraging of Treasury debt. Treasury debt is declining relative to GDP, from 90% in 2011 to 74% by year-end 2015. State assets will be sold in order to pay down debt and reduce the interest burden still further. In this context, the Government aims to sell a 30% stake in Landsbankinn hf. in the next two years, so as to pay down loans taken to recapitalise domestic financial institutions following the collapse of the banks. 

One of the main aims of fiscal policy is to increase investment and value creation in the domestic economy. A more efficient tax system and lower taxes play a key role in this. 

Significantly increased allocations to innovation and science are a facet of the Science and Technology Policy Council's action plan, which assumes budget funding amounting to 3.0% of GDP in 2016. The measures provided for in the action plan are intended to attract investment by innovation and science companies and contribute to enhanced productivity. The State contribution will increase by ISK 800m in 2015 and ISK 2bn in 2016. 

Presented along with the budget proposal are recommendations for reform of the value-added tax system, which is intended to enhance its efficiency and promote greater equality among economic sectors. The main change involves narrowing the gap between the tax rates and broadening the tax base by reducing the number of exemptions granted. The standard rate will decline from 25.5% to an all-time low of 24%. The reduced rate will increase from 7% to 12%. Exemptions for recreational trips (whale watching, horseback riding, snowmobiling, etc.) will be discontinued. 

The proposal also provides for the removal of the commodity tax, which is currently levied on sugary foods and beverages (ISK per kg or litre), building materials (15%), spare parts for motor vehicles (15%), large appliances such as refrigerators and washing machines (20%), and other electrical equipment items, such as television sets and stereo equipment (25%). The cancellation of all categories of the commodity tax greatly simplifies the system, as well as benefiting households and abolishing an obsolete consumption steering mechanism. With this, the price of various common consumer goods will decline markedly, with the associated positive impact on the price level. 

Concurrent with these changes, child benefits will increase by 13% and will be directed more effectively towards lower-income parents by raising the income-linked reduction ratio by a percentage point. The changes in the value-added tax system, abolition of commodity tax, and increase in child benefits will raise disposable income by 0.5%. The household debt relief measures implemented in autumn 2014 will raise disposable household income by the same amount in coming years. 

Treasury performance
ISK billion nominal prices Proposal
2015
Estimates
2014
Budget
2014
Account
2013
           
Revenues .............................................. 644,5     669,1     613,1     591,4    
Expenditures ......................................... 640,5     631,0     612,1     592,2    
Total balance ...................................... 4,1     38,1     0,9     -0,7    
(%) of GDP ...................................... 0,2     2,0     0,0     0,0    
Primary balance ................................. 70,1     98,5     57,4     57,2    
 (%) of GDP ..................................... 3,5     5,2     3,1     3,2    
Interest revenu ...................................... 18,2     18,1     19,0     16,5    
Interest expenditure .............................. 84,2     78,5     75,5     74,4    
Interest balance .................................. -66,0     -60,4     -56,5     -57,9    
(%) of GDP ...................................... -3,3     -3,2     -3,0     -3,2    
Highlights
  • Continued adherence to conservative, prudent fiscal policy; balanced budget
  • Taxes reduced with abolition of commodity tax and reform of the value-added tax system
  • Continued decline in Treasury debt ratio
  •  Government measures during fiscal years 2014 and 2015 will return to households a total of nearly ISK 40bn, or about 5% of year-2013 disposable income. 
Support for the social welfare system
  • Child benefits will increase by 13%, plus a 2.5% price level update, and the reduction ratio linked to parental income will be raised by a percentage point.
  •  Allocations to social security functions (i.e., pension insurance and social assistance) will increase by ISK 2.4bn, excluding price level and wage increases, which total another ISK 3bn. The main provisions are an increase in the tax-free threshold for senior citizens' pension income and an extension of the increase in the tax-free threshold for disability pensioners' earned income. • New and increased allocations to healthcare amount to ISK 1.8bn. These are intended primarily to strengthen hospital and healthcare centre operations and for investment in equipment.
Reform of the value-added tax system and abolition of commodity tax
  • The standard value-added tax rate will decline from 25.5% to 24%, effective 1 January 2015. 
  • The reduced value-added tax rate will rise from 7% to 12%, effective 1 January 2015.
  • Fewer exemptions from value-added tax will be granted, and recreational transport will be taxed according to the reduced value-added tax rate effective 1 May 2015.
  • The commodity tax will be discontinued as of 1 January 2015. The abolition of the tax will apply to various electrical equipment items and large household appliances, building supplies, motor vehicle spare parts, and goods containing sugar and other sweeteners. 
Other measures
  • Increased allocations to transport projects – ISK 850m
  • Increased allocations to the University of Iceland Research Fund and the Technological Development Fund – ISK 800m
  • Strengthening of upper secondary school operations – ISK 400m
  • ISK 5.4bn in 2015, for development at Bakki near Húsavík, construction of a prison at Hólmsheiði, and construction of the Norðfjarðargöng tunnel.