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BUDGET PROPOSAL 2016 MEDIUM-TERM FISCAL PLAN 2016-2019 September 18th 2015 IRREGULAR ITEMS ON THE REVENUE SIDE Revenue side: Capital income tax paid by Treasury itself Proceeds from sales of asset above book value Reappraisal of financial assets Temporary effects on tax revenue in relation to the household debt relief program and third-pillar savings withdrawals in 2015-2019 Part of the bank tax in 2014-2017 (levies on estates of fallen banks) Part of the special FAT in 2014-2015 (levies on estates of fallen banks) Special dividend to the Treasury due to the reduced equity in the CBI in 2014 Irregular dividends 2 fjarlog.is Budget Proposal 2016 » In some of the graphs and tables in the following presentation the figures have been adjusted for certain irregular, one-off and transitory items to bring to light the underlying evolution in the fiscal finances. IRREGULAR ITEMS ON THE EXPENDITURE SIDE Expenditure side: Capital income tax paid by Treasury itself Tax write-offs Liabilities of public employee‘s pension funds Defaulted loans with state guarantees Write-offs of outstanding claims Depreciation of equity in funds and companys Equity contributions to the Housing Financing Fund (HFF) Expenses due to temporary debt relief for households in 2014-2017 3 fjarlog.is Budget Proposal 2016 » In some of the graphs and tables in the following presentation the figures have been adjusted for certain irregular, one-off and transitory items to bring to light the underlying evolution in the fiscal finances. FISCAL OBJECTIVES AND PROSPECTS BUDGET PROPOSAL 2016 1. SPRING FISCAL PLAN 2016-2019 - MAIN TARGETS 5 Total balance Surplus should grow steadily over the period reaching at least 1% of GDP in 2018. Revenue Primary revenue* growth should not to exceed the growth of GDP until 2019. Expenditure Primary expenditure* should grow more slowly than GDP and somewhat slower than primary revenue and decrease by 1% of GDP until 2019. Debt Gross debt should decrease by 10% in nominal terms and by 15% as a percentage of GDP between the years 2015 and 2019. Capital expenditure Maintain the current level of capital expenditure at 1.2% of GDP until 2019. * excluding irregular and temporary items . fjarlog.is Budget Proposal 2016 Targets 696.3 Expenditure Revenue 681.0 Surplus 15.3 6 fjarlog.is bn. kr. Budget Proposal 2016 TREASURY OVERALL BALANCE 2016 TREASURY PRIMARY BALANCE 2005-2019* Balance % of GDP Revenue, expend. % of GDP 32.0 8.0 31.0 6.0 4.0 29.0 2.0 28.0 0.0 27.0 26.0 -2.0 25.0 -4.0 24.0 -6.0 23.0 -8.0 22.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Primary balance (L-axis) Primary revenue (R-axis) Primary expend. (R-axis) * excluding irregular items Adjusted for the transfer of the services for disabled people from the state to local governments. 7 fjarlog.is Budget Proposal 2016 30.0 TREASURY OVERALL BALANCE 2005-2019* Balance % of GDP 10.0 34.0 8.0 33.0 6.0 32.0 4.0 31.0 2.0 30.0 0.0 29.0 -2.0 28.0 -4.0 27.0 -6.0 26.0 -8.0 25.0 -10.0 24.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total balance (l.axis) Total revenue (r.axis) Total expenditure (r.axis) * excluding irregular items Adjusted for the transfer of the services for disabled people from the state to local governments. 8 fjarlog.is Budget Proposal 2016 Revenue, expend. % of GDP ECONOMIC PROSPECTS BUDGET PROPOSAL 2016 2. 2014 2015 2016 2017 2018 2019 Private consumption 3,7 4,2 4,1 3,0 2,5 2,5 Public consumption 1,8 1,8 1,5 1,7 1,5 2,2 13,7 18,1 14,6 2,9 -0,4 5,2 Business sector 15,1 20,8 16,0 1,5 -3,0 4,2 Residential construction 14,9 20,3 19,3 12,2 9,4 8,7 7,5 2,5 1,5 -1,0 0,5 5,0 Domestic final expenditure 5,3 6,2 5,4 2,7 1,7 3,0 Exports 3,1 5,3 3,3 3,5 4,2 2,7 Imports 9,9 10,2 8,1 3,5 2,5 3,8 GDP 1,9 3,8 3,0 2,7 2,6 2,5 Inflation 2,0 2,0 4,5 4,1 3,2 2,6 Wages 5,6 7,5 8,0 6,0 5,0 5,0 Fixed capital Government services * Economic forecast from Statistic Iceland, June 2015 10 fjarlog.is Budget Proposal 2016 MAIN ECONOMIC ASSUMPTIONS FOR THE BUDGET PROSPECTS FOR THE REAL ECONOMY % % 25 Forecast 8 20 6 15 4 10 2 5 0 0 -2 -5 -4 -10 -6 -15 2010 2011 fjarlog.is 2013 2014 2015 2016 2017 2018 Private consumption (l-axis) Public consumption (l-axis) GDP (l-axis) Gross fixed capital formation (r-axis) Source: Statistic Iceland 11 2012 2019 Budget Proposal 2016 10 CONTINUOUS ECONOMIC GROWTH % 10 Forecast 8 4 2 0 -2 -4 -6 -8 -10 2007 2008 2009 Source: Statistic Iceland 12 fjarlog.is 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Budget Proposal 2016 6 A MORE DIVERSIFIED EXPORT SECTOR Other services 17% Agricultural products 1% Tourism 29% Aluminium and Ferrosilicon 21% Other manufactured goods and products 9% Source: Statistic Iceland 13 fjarlog.is Budget Proposal 2016 Marine products 22% SURGE IN TOURISM Monthly number of visitors 200,000 180,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2007 2008 2009 Source: Icelandic Tourist Board 14 fjarlog.is 2010 2011 2012 2013 2014 2015 Budget Proposal 2016 160,000 REAL WAGES HAVE BEEN RISING STEADILY Index: 2007=100 140 Forecast 120 110 100 90 80 2007 2008 Source: Statistic Iceland 15 fjarlog.is 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Budget Proposal 2016 130 INFLATION HAS BEEN LOW BUT IS RISING % 14 Forecast 10 8 6 4 2 0 2000 2002 2004 2006 Inflation Source: Statistic Iceland 16 fjarlog.is 2008 2010 2012 2014 Inflation target 2016 2018 Budget Proposal 2016 12 GROSS FIXED CAPITAL FORMATION % of GDP 40 Forecast 35 25 20 15 10 5 0 1980 1985 Source: Statistic Iceland 17 fjarlog.is 1990 1995 2000 2005 2010 Gross Fixed Capital Formation GFCF average 1980–2014 Business Sector Investment BSI average 1980-2014 2015 2019 Budget Proposal 2016 30 PRIVATE CONSUMPTION % 10 Forecast 8 4 2 0 -2 -4 -6 -8 -10 -12 2007 2008 2009 2010 Source: Statistic Iceland 18 fjarlog.is 2011 2012 2013 2014 2015 2016 2017 2018 2019 Budget Proposal 2016 6 BUSINESS SECTOR INVESTMENT % 30 Forecast 10 0 -10 -20 -30 -40 -50 -60 2007 2008 Source: Statistic Iceland 19 fjarlog.is 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Budget Proposal 2016 20 UNEMPLOYMENT % 8 Forecast 7 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Statistic Iceland 20 fjarlog.is Budget Proposal 2016 6 UNEMPLOYMENT BY EDUCATION % 8.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1991 1993 1995 1997 1999 Secondary education Source: Statistic Iceland 21 fjarlog.is 2001 2003 2005 Primary education 2007 2009 2011 University education 2013 Budget Proposal 2016 7.0 UNEMPLOYMENT BY DURATION % 8.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2003 2005 <3 months Source: Statistic Iceland 22 fjarlog.is 2007 3 to 5 months 2009 2011 6 to 11 months 2013 Year or longer Budget Proposal 2016 7.0 PRODUCTIVITY AND TOTAL HOURS WORKED, BY SECTOR 2009-2014 Financial services IT and telecom Manufacturing Fisheries Retail and wholesale trade Public sector, etc. Tourism Misc. specialised services -10 -8 -6 -4 Total hours worked Source: Central Bank 23 fjarlog.is -2 0 Productivity 2 4 6 8 10 % Budget Proposal 2016 Construction UNIT LABOUR COST 1999=100 220 180 160 140 120 100 80 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Iceland Germany OECD Euro area USA Source: Central Bank 24 fjarlog.is Budget Proposal 2016 200 REAL EXCHANGE RATE 140 100 80 60 40 20 0 2000 q1 CPI 2002 q1 Source: Central Bank 25 fjarlog.is 2004 q1 2006 q1 Wages 2008 q1 2010 q1 2012 q1 2014 q1 Budget Proposal 2016 120 BALANCE OF TRADE IN GOODS AND SERVICES b.kr. 80,000 40,000 20,000 0 -20,000 -40,000 -60,000 -80,000 1995 1997 Source: Statistic Iceland 26 fjarlog.is 1999 2001 2003 2005 2007 2009 2011 2013 2015 Budget Proposal 2016 60,000 TERMS OF TRADE Index, 2005 = 100 94 Forecast 90 88 86 84 82 80 2008 2009 Source: Central Bank 27 fjarlog.is 2010 2011 2012 2013 2014 2015 2016 2017 Budget Proposal 2016 92 DEBT % of GDP 500 450 350 300 250 200 150 100 50 0 2004 2005 2006 2007 Corporate Source: Central Bank 28 fjarlog.is 2008 2009 Household 2010 2011 Public sector 2012 2013 2014 Budget Proposal 2016 400 HOUSEHOLD DEBT Housing capital % 140 70 120 60 100 50 80 40 60 30 40 20 20 10 0 0 2007 2008 2009 2010 Household debt, % of GDP (l-axis) Source: Central Bank 29 fjarlog.is 2011 2012 2013 Housing capital (r-axis) 2014 Budget Proposal 2016 Debt % of GDP HOUSEHOLD DEBT % 140 100 80 60 40 20 0 2004 2005 Indexed Source: Central Bank 30 fjarlog.is 2006 2007 Exchange rate-linked 2008 2009 Overdraft 2010 Non-indexed 2011 2012 2013 2014 Asset financing agreements Budget Proposal 2016 120 FISCAL BALANCE BUDGET PROPOSAL 2016 3. FISCAL OUTCOME 2014 » The surplus was 46,4 bn. kr. (2,3% of GDP) in the Treasury accounts or 8,4 bn. kr. greater than in the MoF prior estimate in the budget for 2015. • Expenditures turned out to be around 5 bn. lower than in the prior outcome projection • Mostly due to a reduction in pension liabilities by 5,2 bn. • Revenues were 3,4 bn. higher than projected • Thereof: tax revenues 6,8 bn. higher and asset sales 1 bn. higher while other current revenues were 4,5 bn. lower than projected 32 fjarlog.is Budget Proposal 2016 » The Treasury returned a surplus in the fiscal year 2014 for the first time in 7 years. » In the budget for 2015, a slight overall surplus was projeced but a reassessment after the first half of the year indicates a better outcome. • Heading for 21 bn. kr. surplus instead of 3,5 bn. in the budget. • The improvement is largely due to favorable one-off revenue, mainly dividends from financial institutions, but also stems from lower interest expenditure. » Revenue increase by 26,4 bn. to 680,1 bn. • Thereof is a 14,2 bn. increase in tax revenue and a 12,2 bn. increase in other current revenue » Primary expenditure increases by 8,9 bn. to 659 bn. » Interest balance improves by ISK 5 bn. due to lower intererst costs 33 fjarlog.is Budget Proposal 2016 ESTIMATED FISCAL OUTCOME 2015 FISCAL OUTLOOK 2016-2019 • The outlook allows for some real growth both on the revenue side and the expenditure side until 2019, albeit somewhat slower than GDP growth. • The plan aimes for continued expenditure restraint so that growth in primary expenditure will be moderate in real terms, or 1,3% annually on average which will accumulate to around 5% over the forecasting period. Thus, the target for primary expenditure, excluding irregular items, implies a reduction of 1,2% of VLF. • Target for the revenue side entails that the GDP ratio of primary revenue, excluding irregular items, will not rise over the period. Actually, it is projected to decrease by 0,5%. • In addition, interest expenditure are expected to fall by 1,3% of GDP over the period. This is based on proposed measures in the balance sheet as well as debt reduction by means of income stemming from the liberalization of capital controls. 34 fjarlog.is Budget Proposal 2016 » Current fiscal outlook assumes restrained expenditure growth that will generate a growing surplus in the last three years of the fiscal plan TOTAL BALANCE 2010-2019* INCLUDING AND EXCLUDING IRREGULAR ITEMS bn. kr. 100 77 63 32 37 42 48 21 21 15 2015 proj. 2016 2017 4 34 48 0 -50 -44 -15 -36 -1 -64 -100 -150 -89 -123 2010 2011 2012 2013 Total balance incl. irregular items 2014 2018 Total balance excl. irregular items *Balance in 2010 adjusted for the transfer of the services for disabled people from the state to local governments. 35 fjarlog.is 2019 Budget Proposal 2016 43 50 INTEREST BALANCE 2005-2019 bn. kr. bn. kr. 100 80 80 60 60 40 40 20 20 0 -20 0 -4 3 2 6 -20 -40 -40 -60 -39 -40 -46 -54 -58 -60 -59 -58 -52 -50 -46 -80 -80 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Interest revenue 36 -60 fjarlog.is Interest expenditure Interest balance Budget Proposal 2016 100 PRIMARY BALANCE 2010-2019* INCLUDING AND EXCLUDING IRREGULAR ITEMS bn. kr. 150 100 80 80 57 62 95 94100 73 84 122 93 39 50 18 2 0 -25 -50 -100 -43 -85 2010 2011 2012 2013 2014 Primary balance incl. irregular items 2015 proj. 2016 2017 2018 Primary balance excl. irregular items *Balance in 2010 adjusted for the transfer of the services for disabled people from the state to local governments. 37 fjarlog.is 2019 Budget Proposal 2016 104 92 114 PRIMARY REVENUE AND EXPENDITURE 2005-2019* % of GDP 34 30 28 26 24 22 20 2005 2006 2007 2008 2009 2010 2011 Primary revenue * Excluding irregular items 38 fjarlog.is 2012 2013 2014 2015 2016 Primary expenditure 2017 2018 2019 Budget Proposal 2016 32 REVENUE SIDE BUDGET PROPOSAL 2016 4. REVENUE ASSUMPTIONS 2016–2019 » Macroeconomic projections from Statistics Iceland in early June for 2016-2019 » Reassessment of developments in tax bases in 2015 in light of changes in main premises and economic prospects Tax system reform » Impact of earlier measures which become effective in 2016 » New measures effective in 2016–2017 » Personal income tax » Import duties » Excise on motor vehicles » Taxation of alcohol Other specific assumptions and measures 40 fjarlog.is Budget Proposal 2016 Macroeconomic assumptions REVISED REVENUE ESTIMATE FOR 2015 (A) b.kr. 685 +17,7 –1,1 Dividend, interest receipts Other, net 680 680.1 670 +4,8 665 +5,0 660 655 653.7 650 645 640 Budget 2015 41 fjarlog.is General revision: taxes on labour General revision: other taxes Revised estimate 2015 Budget Proposal 2016 675 REVISED REVENUE ESTIMATE FOR 2015 (B) B.kr. Change accrual cash accrual cash accrual cash 600,1 578,3 614,3 597,3 14,2 19,1 222,2 211,4 238,0 231,8 15,8 20,4 78,7 77,1 79,2 77,0 0,4 -0,1 Taxes on labour 6,8 6,8 7,1 7,0 0,2 0,2 Property taxes 7,0 7,0 7,2 7,5 0,2 0,5 248,8 239,5 248,0 239,3 -0,8 -0,2 Other taxes 36,6 36,6 34,8 34,8 -1,8 -1,8 Other revenue 50,6 49,0 62,8 62,8 12,2 13,8 Asses sales 0,8 0,8 0,8 0,8 0,0 0,0 Grants 2,1 2,1 2,2 2,2 0,0 0,0 653,7 630,2 680,1 663,1 26,4 32,9 Tax revenue incl. SSCs Taxes on income and profits Social security contributions (SSCs) Taxes on goods and services Total revenue 42 Revised fjarlog.is Budget Proposal 2016 Budget Economic outlook for fairly strong growth ahead Tax policy aims for lower tax burden for households and reliance on more efficient indirect taxes Tax revenues (excl. irregular items) decline slightly in medium-term, from 26,5% in 2015 to 26,2% in 2019 Tax reforms since 2013 result in 25 bn. kr. reduction (excl. bank tax) in tax revenue in 2016 » Households benefit most from reduced tax burden Total revenues (excl. irregular items) shrink from 28,7% in 2015 to 28,0% in 2019 Total revenues shrink from 31,4% in 2015 to 28,2% in 2019 as large temporary items are lost 43 fjarlog.is Budget Proposal 2016 REVENUE ESTIMATE 2016–2019: MAIN RESULTS Accrual basis, billion kr.1 2015 2016 2017 2018 2019 Total revenue 680.1 696.3 731.0 748.8 787.4 Tax revenue 614.3 646.5 681.9 696.4 735.1 Primary revenue 662.6 679.7 714.3 730.5 770.0 Interest receipts 17.5 16.6 16.6 18.2 17.4 31.4 29.9 29.3 28.3 28.2 Tax revenue 28.4 27.7 27.4 26.3 26.4 Primary revenue 30.6 29.2 28.7 27.6 27.6 Interest receipts 0.8 0.7 0.7 0.7 0.6 % of GDP Total revenue 1. Irregular items are not excluded. 44 fjarlog.is Budget Proposal 2016 REVENUE ESTIMATE 2015–2019: OVERVIEW (A) REVENUE ESTIMATE 2015–2019: OVERVIEW (B) Accrual basis, billion kr.1 2015 2016 2017 2018 2019 Total revenue 622.6 671.3 705.5 744.4 781.7 Tax revenue 574.2 622.3 657.2 692.9 730.2 Primary revenue 605.1 654.7 688.8 726.2 764.3 28.7 28.8 28.3 28.1 28.0 Tax revenue 26.5 26.7 26.4 26.2 26.2 Primary revenue 27.9 28.1 27.6 27.5 27.4 % of GDP Total revenue 1. Irregular items are: capital income tax paid by Treasury itself, all proceeds from asset sales and revaluation of financial assets (narrow definition) and also the following items: temporary side effects on tax revenues from the Household Debt Reduction Programme 2015–2019; part of bank tax 2014– 2017; part of special FAT 2014–2015; special dividend from reduction of CB capital 2014; part of Landsbanki dividend 2013–2015; temporary side effects from third-pillar pension savings withdrawals in 2015. 45 fjarlog.is Budget Proposal 2016 Excl. irregular items (broadly defined)1 TREASURY TAX REVENUE 2013–2019 % of GDP 30.5 30.0 29.0 28.5 28.0 27.5 27.0 26.5 26.0 46 fjarlog.is 2013 2014 2015 2016 Total Excl. irregular (narrowly defined) 2017 2018 2019 Excl. irregular (broadly defined) Budget Proposal 2016 29.5 TREASURY REVENUE 2001–2019* % of GDP 34 33 31 30 29 28 27 26 25 24 23 2001 2003 2005 2007 Total revenue * Excluding irregular items. 47 fjarlog.is 2009 2011 2013 Primary revenue 2015 2017 Tax revenue 2019 Budget Proposal 2016 32 TREASURY TAX REVENUE 2001–2019 % of GDP 32 31 29 28 27 26 25 24 23 2001 2003 2005 2007 2009 2011 2013 Tax revenue excl. irregular items (broadly defined) 48 fjarlog.is 2015 2017 Tax revenue 2019 Budget Proposal 2016 30 TREASURY TOTAL REVENUE 2008–2019 % of GDP 35 33 32 31 30 29 28 27 2008 Total 49 fjarlog.is 2010 2012 2014 Excl. narrowly defined irregular items 2016 2018 Excl. broadly defined irregular items Budget Proposal 2016 34 REVENUE ESTIMATE OF BUDGET PROPOSAL 2016: CHANGE FROM AUTUMN 2014 b.kr. 720 +51.6 –7.1 –3.3 –2.5 700 696.3 690 680 670 665.1 660 650 Autumn 2014 50 fjarlog.is General revision Tax reform 2015 Tax reform 2016 Interest receipts, dividends Other, net Budget proposal Budget Proposal 2016 –7.4 710 BUDGET PROPOSAL REVENUE ESTIMATE: NOMINAL CHANGE BETWEEN 2015 AND 2016 b.kr. 740 +27.9 +3.0 –10.9 730 –22.6 720 710 +25.0 700 696.3 690 680 680.1 670 Revised estimate 2015 51 fjarlog.is General revision: taxes on labour General revision: other taxes Other, net Tax reform 2016 Bank tax Interest receipts dividends Budget proposal 2016 Budget Proposal 2016 –6.3 BUDGET PROPOSAL REVENUE ESTIMATE 2016: BREAKDOWN RANKED BY SIZE Asset sales Other taxes Per capita PIT Property taxes Budget Proposal 2016 Payroll taxes Fishing Levy Other revenue Dividends Interest receipts Bank tax Capital income tax CIT Other indirect taxes SSCs PIT VAT 0 52 fjarlog.is 20 40 60 80 100 120 140 160 180 Billion kr. Budget Revised budget Budget proposal 2014 2015 2015 2016 Total revenue 688.9 653.7 680.1 696.3 Tax revenue 601.8 600.1 614.3 646.5 Direct taxes 364.3 351.3 366.3 381.9 Indirect taxes 237.5 248.8 248.0 264.7 Interest receipts 18.6 18.2 17.5 16.6 Primary revenue 670.3 635.5 662.6 679.7 78.2 38.6 57.5 25.0 50.9 37.8 40.1 24.2 Total revenue excl. irregular 610.7 615.1 622.6 671.3 Tax revenue excl. irregular 550.9 562.4 574.2 622.3 Billion kr. Irregular items thereof tax items 53 fjarlog.is Treasury Account Budget Proposal 2016 REVENUE DEVELOPMENTS 2014–2016 (A) Treasury Account Budget Revised budget Budget proposal % of GDP 2014 2015 2015 2016 Total revenue 34.6 30.7 31.4 29.9 Tax revenue 30.2 28.2 28.4 27.7 Direct taxes 18.3 16.5 16.9 16.4 Indirect taxes 11.9 11.7 11.4 11.4 Interest receipts 0.9 0.9 0.8 0.7 Primary revenue 33.6 29.8 30.6 29.2 3.9 1.8 2.7 1.1 2.6 1.8 1.9 1.0 Total revenue excl. irregular 30.6 28.9 28.7 28.8 Tax revenue excl. irregular 27.6 26.4 26.5 26.7 Irregular items thereof tax items 54 fjarlog.is Budget Proposal 2016 REVENUE DEVELOPMENTS 2014–2016 (B) NEW TAX REFORM PROPOSALS 2016–2017 Reform of personal income tax (PIT) (two phases) Import duties in certain categories repealed » All clothing and shoes in first phase » All other, except food items, in second phase Tax relief for rental cars repealed in two phases Taxation of alcohol (revenue neutral in short-term) » Reduced VAT rate; excise raised to offset lost VAT revenue » Simplification for restaurants and improved compliance Effective tax rate on income from lease of residential housing reduced from 14% to 10% 55 fjarlog.is Budget Proposal 2016 » Number of rates reduced from three to two » Reduced tax burden for all income groups, most for middle groups TAX REFORMS IMPLEMENTED IN 2016 PIT Excise on rental cars Electricity tax SSCs Radio Fee VAT (tourism) Excises -6 -5 -4 -3 -2 -1 0 1 2 Billion kr. 56 fjarlog.is Budget Proposal 2016 Import duties Accrual basis, b.kr. 2016 2017 2018 2019 PIT -5.5 -11.0 -11.0 -11.0 Import duties -2.5 -5.7 -5.9 -6.1 Excises on rental cars 0.6 2.5 2.5 2.5 Capital income tax on lease income . -0.4 -0.4 -0.4 VAT (taxis) . 0.1 0.1 0.1 Taxation of alcohol . . . . -7.4 -14.5 -14.7 -14.9 Total 57 fjarlog.is Budget Proposal 2016 NEW TAX REFORM PROPOSALS 2016–2017: REVENUE IMPACT IN 2016–2019 TAX REFORM SINCE 2013: REVENUE IMPACT IN 2016–2019 Billion kr. 2015 2016 2017 2018 2019 Tax reform in Parliament 2013/2014 ............... thereof bank tax .......................................... Tax reform in Parliament 2014/2015 .............. Tax reform in budget proposal for 2016 .......... Tax reform, total ................................ thereof bank tax ............................. thereof other than bank tax ............... 21,4 32,1 -4,8 . 16,7 32,1 -15,4 12,5 25,7 -4,7 -7,4 0,4 25,7 -25,3 11,8 26,0 -4,3 -14,5 -7,0 26,0 -33,0 -11,5 3,1 -4,6 -14,7 -30,8 3,1 -33,9 -10,8 3,3 -5,0 -14,9 -30,7 3,3 -34,0 Earlier measures Temporary provisions expire .......................... Tax reform and earlier measures ............. thereof other than bank tax ............... -8,4 8,3 -23,8 -10,8 -10,5 -36,2 -10,8 -17,7 -43,7 -10,8 -41,5 -44,6 -10,6 -41,3 -44,6 The total revenue impact in each year 58 fjarlog.is Budget Proposal 2016 Tax reform since autumn 2013 THE PIT RATE STRUCTURE 1988–2015 50% 45% 40% 30% 25% 20% 15% 10% 5% 0% 1988 1991 1994 Local government 59 fjarlog.is 1997 Central gov., first bracket 2000 2003 Special surcharge in 1993-2005 2006 2009 Central gov., second bracket 2012 2015 Central gov., third bracket Budget Proposal 2016 35% PIT REFORM IN 2016 AND 2017 2015 2016 2017 22.86% 22.68% 22.50% Bracket 2 (additional) ........................................ 2.44% 1.22% 9.30% Bracket 3 (additional) ........................................ 6.50% 7.90% - 31.80% 31.80% 31.80% 14.44% 14.44% 14.44% Bracket 1 ................................................................ 37.30% 37.12% 36.94% Bracket 2................................................................ 39.74% 38.34% 46.24% Bracket 3................................................................ 46.24% 46.24% - Lower............................................................. 309.1 309.1 - Upper................................................................ 836.4 770.0 700.0 Central and local government PIT rates Bracket 1 ................................................................ Total............................................................... Local government (average rate)........................................ PIT rate total Bracket threshold per month (thous. kr.) No change is assumed in the average tax rate for local government PIT which is 14.44% in 2015. Bracket thresholds, currently linked to the wage index, will continue to be indexed in the same way. 60 fjarlog.is Budget Proposal 2016 Central government PIT REFORM: EFFECT ON DISPOSABLE INCOME 2017 kr./month 14,000 10,000 8,000 6,000 4,000 2,000 0 100 200 300 400 500 600 700 800 900 1000 income thous.kr./month 61 fjarlog.is Budget Proposal 2016 12,000 PIT BURDEN BEFORE AND AFTER THE REFORM Tax burden 40% 30% 25% 20% 15% 10% 5% 0% 0 100 200 300 400 500 PIT 2015 62 fjarlog.is 600 700 PIT 2017 800 900 1,000 1,100 Income thous.kr./month Budget Proposal 2016 35% MARGINAL PIT RATES BEFORE AND AFTER THE REFORM % 48% 46% 42% 40% 38% 36% 34% 32% 30% 100 200 300 400 500 PIT 2015 63 fjarlog.is 600 PIT 2017 700 800 900 1000 income thous.kr./month Budget Proposal 2016 44% TAX EXEMPTION THRESHOLD PER MONTH 2007–2017* kr./month 240,000 220,000 180,000 160,000 140,000 120,000 100,000 2007 2008 2009 2010 2011 Central government 2012 2013 2014 2015 Local government 2016 2017 *At fixed 2015 prices. It is assumed that a 4% pension contribution is deducted before tax is calculated. fjarlog.is Budget Proposal 2016 200,000 PERSONAL INCOME TAX BURDEN AND SHARE OF CENTRAL AND LOCAL GOVERNMENT 2013–2017 Tax burden per month 40% 35% 25% 20.45%20.05%19.77%19.72% 13.55% 13.12% 12.51% 11.90% 20% 17.05%16.60% 15.76%14.93% 5.38% 5.19% 5.01% 4.83% 15% 10% 1.69% 1.65% 1.47% 1.29% 14.44% 14.44% 14.42%14.44% 14.44% 5% 14.44% 14.42% 14.44% 14.44% 14.44% 14.42% 14.44% 14.42%14.44%14.44%14.44% 14.42%14.44%14.44%14.44% Monthly income: 250.000 300.000 Local gov. PIT 65 fjarlog.is 500.000 Central gov. PIT 700.000 1.000.000 2017 2016 2015 2013 2017 2016 2015 2013 2017 2016 2015 2013 2017 2016 2015 2013 2017 2016 2015 2013 0% Budget Proposal 2016 30% PIT TO CENTRAL AND LOCAL GOVERNMENT 1988–2014 100% 90% 70% 60% 50% 40% 30% 20% 10% 0% 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Central 66 fjarlog.is Local Budget Proposal 2016 80% THE PIT SYSTEM IN 2016: NET IMPACT BY LEVEL OF GOVERNMENT (B.KR.) 10,9 (3%) Tax credit towards payment of local government PIT Central government PIT, net Child benefits Interest rebates Local government PIT 173,2 (53%) 10,9 (3%) 6,2 (2%) 67 fjarlog.is Budget Proposal 2016 126,8 (39%) m.kr. 7,000 % of tax revenue 1.4 6,000 1.2 5,000 1.0 4,000 0.8 3,000 0.6 2,000 0.4 1,000 0.2 0 0.0 2014 Food 68 fjarlog.is 2015 Clothes and shoes 2016 2017 Other items % of tax revenue Budget Proposal 2016 IMPORT DUTIES: REVENUE COMPOSITION BY TYPE OF GOODS 2014–2017 IMPORT DUTIES: SHARE OF TOTAL REVENUE 1990–2019 % 4.5 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 69 fjarlog.is Budget Proposal 2016 4.0 IMPORT DUTIES REPEALED FROM CERTAIN GOODS 1 January 2017: All goods except food Rates in the range 7.5% – 15% 70 Clothes – examples: Other goods – examples: - - Pants Jackets Shirts Sportswear Sports shoes Lingerie fjarlog.is School bags Household appliances, white and brown Fishing and hunting gear Cleaning and cosmetics Kitchenware Baby prams and strollers Goods for pets (not food) Car spare parts Budget Proposal 2016 1 January 2016:Clothes and shoes Most common rate is 15% EXCISE ON MOTOR VEHICLES: RELIEF FOR RENTAL CARS (A) The relief will be reduced in 2016 and fully repealed in 2017 The revenue yield is estimated 0.6 billion in 2016 and 2.5 billion in 2017 (side effect on VAT included) The original argument for this relief is no longer relevant; the market for car rentals has changed dramatically In 2011 the excise was reformed into a CO2-based tax The cap amount was reduced in 2015 with a „promise“ to further reduce it 71 fjarlog.is Budget Proposal 2016 Car rental companies have since 2000 benefited from a reduced excise duty on rental cars – with a cap per car since 2011 COMPOSITION OF TAX REVENUE IN 2007, 2013 AND 2016* share of total tax revenue 40% 30% 25% 20% 15% 10% 5% 0% Taxes on income and profit SSCs VAT 2007 * Irregular items are excluded. 72 fjarlog.is 2013 Other on goods and services 2016 Other taxes Budget Proposal 2016 35% REVENUE FROM VAT 1998–2016 % of tax revenue 38 % of GDP 37 11.5 36 11.0 35 10.5 34 10.0 33 9.5 32 9.0 31 8.5 30 8.0 29 7.5 28 7.0 27 6.5 26 6.0 1998 2000 2002 2004 2006 % of tax revenue (left-hand axis) 73 fjarlog.is 2008 2010 2012 2014 % of GDP (right-hand axis) 2016 Budget Proposal 2016 12.0 TAX REVENUE COMPOSITION 2007–2016 100% 0.4% 0.5% 1.6% 1.4% 1.5% 1.9% 2.2% 49.0% 46.3% 46.4% 45.4% 46.0% 46.2% 43.8% 2.9% 1.8% 10.6% 1.4% 2.3% 2.5% 3.2% 12.6% 16.0% 15.8% 14.9% 7.3% 6.5% 5.1% 39.5% 40.4% 40.9% 3.1% 2.9% 1.2% 1.2% 15.0% 13.4% 14.1% 14.5% 80% 70% 60% 50% 40% 10.1% 30% 20% 37.6% 40.7% 38.0% 34.8% 34.3% 33.8% 35.9% 37.0% 37.8% 38.3% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 10% 0% Taxes on income and profit Property taxes 74 fjarlog.is Taxes on labour/payroll Other taxes Taxes on goods and services Budget Proposal 2016 90% EXPENDITURE SIDE BUDGET PROPOSAL 2016 5. Estimate 2016 Estimate 2017 Estimate 2018 Estimate 2019 Total expenditures 681,0 689,2 714,7 739,6 Irregular items Pension liabilities Capital gains tax Tax write-offs Unemployment M unicipal Equalisation Fund State guarantees Write-offs of outstanding claims Contributions to HFF Amortization of indexed mortgages Interest expenditures Total irregular items 12,4 5,0 13,0 13,3 19,4 0,0 0,1 1,3 15,5 74,4 154,4 13,9 4,6 13,8 13,9 20,4 0,0 0,1 0,0 0,0 68,4 135,1 14,4 5,0 14,1 14,3 21,0 0,0 0,1 0,0 0,0 68,7 137,6 14,9 4,9 15,0 14,8 22,0 0,0 0,1 0,0 0,0 62,9 134,7 Expenditure frame 526,6 554,1 577,2 604,9 ISK bn. 76 fjarlog.is Budget Proposal 2016 BUDGET FRAMEWORK 2016-2019 BUDGET FRAMES FOR MINISTRIES 2016* Proposal 2016 ch. ISK bn. ch. % Budget frames The Presidency, Althingi and Supreme Court............... Office of the Prime M inister.......................................... M inistry of Education, Science and Culture.................. M inistry for Foreign Affairs**...................................... M inistry of Industries and Innovation.......................... M inistry of the Interior**............................................. M inistry of Welfare....................................................... M inistry of Finance and Economic Affairs................... M inistry for the Environment and Natural Resources.. Total, excl. irregular items........................................ 4,3 3,1 72,9 11,5 30,6 58,1 253,6 41,4 10,1 485,6 4,4 3,3 75,1 12,7 31,4 59,5 262,4 41,3 10,1 500,2 0,1 0,2 2,2 1,2 0,8 1,3 8,8 -0,1 0,1 14,6 2,7 6,4 3,0 10,3 2,8 2,3 3,5 -0,1 0,8 3,0 Interest expenditures...................................................... Other irregular items...................................................... Total irregular items.................................................. 82,5 82,0 164,5 74,4 77,4 151,8 -8,1 -4,6 -12,7 -9,8 -5,7 -7,7 Total, incl. irregular items......................................... 650,1 652,0 1,9 0,3 ISK bn. 77 *excluding wage- and price changes in the 2016 budget proposal ** in the budget proposal a ISK 0.8 bn. are transferred from Ministry of Interior to the Ministry of Foreign Affairs in line with transfer of defense-related tasks between ministries. fjarlog.is Budget Proposal 2016 Budget 2015 EXPENDITURE CHANGES FROM 2015 BUDGET ISK bn. 700.0 690.0 -8.1 29.0 670.0 -0.8 660.0 12.4 650.0 640.0 681.0 -1.6 650.1 630.0 620.0 Budget 2015 78 fjarlog.is Net ch. in exp. obl. New and increased expenditures Restraint Wage-, price- Interest measures and exchange expenditure rate ch. Budget proposal 2016 Budget Proposal 2016 680.0 NEW AND INCREASED EXPENDITURES Housing affairs – social housing and increased support to tenants 2.6 Increased contribution to Iceland Research Fund and Technology Development Fund 2.0 Increased contribution to various health care items 1.6 Building of recuperation residence and first phase in designing new treatment center for the National hospital 0.9 Increased contribution to education, such as project on strengthening literacy among children 0.5 Establishment of a new regional prosecutors office 0.5 Other 4.3 Total 12,4 *changes from 2015 budget 79 fjarlog.is Budget Proposal 2016 ISK bn. NET CHANGES IN EXPENDITURE OBLIGATIONS IN BUDGET PROPOSAL 2016 Health insurance - excess expenditure in 2015, real growth and contractual expenditures. 2.7 Old age and disability insurance and welfare support payments – real growth 1.8 Government employee‘s pension fund liabilities 1.5 Expenditures financed with earmarked revenues 1.1 Contingency fund - increase due to nominal increase in turnover 1.0 Eliminated temporary contributions -8.2 Household debt relief program - revaluation of capital requirement in relation to settlement with financial institutions -2.9 HFF - lowering of precautionary contribution -2.0 Interest cost rebate – lower expenditure due to lower debt and increased household income -1.5 Other -3.6 Total -1.6 *changes from 2015 budget 80 fjarlog.is Budget Proposal 2016 ISK bn. WAGE AND PRICE ASSUMPTIONS 1. Reassessment of the wage assumptions in the 2015 budget, which come in full effect on the Treasury’s wage cost on annual basis in 2016. • Based on collective agreements and the offer that the Treasury’s negotiation committee have offered in the ongoing negotiations. • Weighted average wage increase for 2016 is 8.6%. 2. Wage increases in 2016. • Based on collective agreements and the offer that the Treasury’s negotiation committee have offered in the ongoing negotiations. • The wage assumption for 2016 is 5.5% wage increase which is the same increase as the increase in salary scales in the private sector in 2016. It is assumed that the increase will take effect on June 1st next year. • Weighted average wage increase for 2016 is 3.6% but when including an unallocated wage pot it is estimated that the increase will be 4.1% in 2016. » Cumulative effects on the Treasury's wage bill is 13.1% in 2016 but 15.1% permanently when taking into account the impact of wage increases in 2016 on annual basis. 81 fjarlog.is Budget Proposal 2016 » Wage assumptions: WAGE AND PRICE ASSUMPTIONS • In the budget proposal it has not been taken into account the outcome of the arbitration panel last August since the figures for the budget proposal were finalized in June. • It is expected that the wage assumptions in the proposal will be revaluated before finalizing the budget in December. » Unemployment benefits and social security benefits: 82 • It is expected that the benefits will be raised by 9.4% from January 1st 2016. • The raise takes into account the Statistics Iceland forecast of the wage index less wage drift, i.e. average salary scales both this year and next. fjarlog.is Budget Proposal 2016 » Wage assumptions: WAGE AND PRICE ASSUMPTIONS • The general price assumption in the proposal is 3.79%. • Taking into account the forecast of 4.5% increase in inflation between 2015 and 2016 but on the other hand adjusted for overestimation of the inflation in current year. The forecast for inflation between 2014 and 2015 is now 2% but the premises in the 2015 budget were 2.7%. » Exchange rate assumptions: 83 • Based on average exchange rate in June 2015. • Similar rates as for the first six months of 2015. • The exchange rate of the US dollar and the British pound has risen but the exchange rate for euro has decreased. fjarlog.is Budget Proposal 2016 » General price assumption: » Projected wage and price changes in the proposal are higher than ever in nominal terms or ISK 29 bn. » Thereof ISK 8.6 bn. are effects on annual basis by wage agreements that were made in 2014 and in the beginning of 2015 along with projection of wage increases for those unions that have not been negotiated with. » In the budget proposal it as assumed that average wage increases of public employees will be similar to those of the private market and not taking into account the effects of the decision of the arbitration panel last August since the figures for the proposal had been finalized. » In addition, wage and price changes for 2016 are estimated to be ISK 20.4 bn. 84 fjarlog.is Budget Proposal 2016 WAGE AND PRICE CHANGES IN 2015 AND 2016 EXPENDITURES BY ECONOMIC FUNCTION* 25.2% Health services 23.2% Social security and welfare services 11.7% Education 9.9% General public services 36 30 Transportation and communication 28 Public order and safety 27 Agriculture, forestry, fishing, and hunting 19 Recreation, culture, and religion 19 Other industries 74 63 12 Housing and community amenities 9 Mining, manufacturing and construction 6 Fuel and energy 4 0 20 40 60 80 100 120 *Irregular items other than interest expenditure are excluded Economic function according to COFOG (Classification of the Functions of Government) fjarlog.is 147 140 160 180 ISK bn. 200 Budget Proposal 2016 Interest expenditure Expenditures not classified by major group 85 160 MAIN EXPENDITURE CHANGES FROM 2015 BUDGET » Total expenditure is expected to be ISK 681 bn. and increases by ISK 30.9 bn. from 2015 budget (1.3% of GDP) » » Excluding projected wage and price changes in 2016, the primary expenditure will increase by ISK 10 bn. (0.4% of GDP) and the total expenditures will increase by ISK 1.9 bn. (0.1% of GDP) 86 fjarlog.is Budget Proposal 2016 » Primary expenditure is estimated ISK 606.6 bn. in 2015 and increases by ISK 39 bn. from the 2015 budget in nominal prices (1.7% of GDP) MAIN EXPENDITURE CHANGES FROM 2015 ESTIMATE » Total expenditure are expected to be ISK 681 bn. and increase by ISK 1.6 bn. from the 2015 estimate. » Including projected wage and price changes in 2015 the primary expenditure will increase by ISK 24.4 bn. and the total expenditures will increase ISK 22 bn. 87 fjarlog.is Budget Proposal 2016 » Primary expenditures are estimated ISK 607 bn. and increase by ISK 4 mia.kr. from the estimate for 2015 in nominal prices DECREASE IN TOTAL EXPENDITURE* % of GDP 33.5 34.0 32.0 30.1 30.0 29.3 28.9 27.9 28.0 26.0 29.9 27.8 27.2 26.4 26.1 25.7 25.3 24.0 22.0 20.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 * Excluding irregular items Adjusted for the transfer of services for disabled people from the state to local governments 88 fjarlog.is 2018 2019 Budget Proposal 2016 31.0 TREASURY’S INTEREST EXPENDITURE 2007-2019 % of GDP 6.0 84 80 76 68 70 79 74 77 74 68 66 5.0 69 63 60 4.0 50 3.0 40 35 30 2.0 22 20 1.0 10 0 0.0 2007 2008 2009 2010 2011 2012 Interest expenditure, ISK bn. (l.axis) 89 fjarlog.is 2013 2014 2015 2016 2017 2018 Interest expenditure, % of GDP (r.axis) 2019 Budget Proposal 2016 ISK bn. 90 MODERATE GROWTH IN PRIMARY EXPENDITURE* ISK bn., 2016 prices 650 612 599 574 569 569 552 552 554 554 2012 2013 2014 2015 560 568 574 583 550 500 450 400 2007 2008 2009 2010 2011 2016 2017 * in 2016 prices excluding irregular items Adjusted for the transfer of the services for disabled people from the state to local governments 90 fjarlog.is 2018 2019 Budget Proposal 2016 600 TREASURY’S CURRENT EXPENDITURE 1998-2019* % of GDP 16.0 14.0 10.0 8.0 6.0 4.0 2.0 0.0 Current expenditure * excluding irregular items 91 fjarlog.is Current expenditure - average 1998-2007 Budget Proposal 2016 12.0 TREASURY’S TRANSFER PAYMENTS 1998-2019* % of GDP 14.0 10.0 8.0 6.0 4.0 2.0 0.0 1998 2000 2002 2004 2006 2008 Transfer payments *excluding irregular items and unemployment benefits 92 fjarlog.is 2010 2012 2014 2016 Transfer payments - average 1998-2007 2018 Budget Proposal 2016 12.0 TREASURY’S MAINTENANCE AND CAPITAL EXPENDITURE 1998-2019* % of GDP 4.0 3.5 2.5 2.0 1.5 1.0 0.5 0.0 1998 2000 2002 2004 2006 Maintenance and capial expenditure * excluding irregular items 93 fjarlog.is 2008 2010 2012 2014 2016 2018 Maintenance and capial expenditure - average 1998-2007 Budget Proposal 2016 3.0 FUNDING AND DEBT MANAGEMENT BUDGET PROPOSAL 2016 6. STRATEGY ON CAPITAL ACCOUNT LIBERALIZATION • The funds that will accrue will firstly be used to offset the special tax on financial institutions ISK 40 bn. • Other funds will be used to reduce public debt • Steps will be thoroughly estimated as time progresses as decisions shall not risk economic or financial stability 95 fjarlog.is Budget Proposal 2016 • Estimated Treasury revenues arising from the execution of the liberalization strategy amounts to ISK 450-850 bn. STABILITY CONDITIONS / STABILITY TAX • More uncertainty is around the stability conditions and possible outcome of the multi product auction • In the fiscal plan it is expected to use the first part of the possible revenues to pay down the CB bond • No other effects are taken into account • More clarity is expected before the budget for 2016 is finalized 96 fjarlog.is Budget Proposal 2016 • The effects of the tax are clear FUNDING AND DEBT MANAGEMENT • Good progress have been made in debt management • Avens loan was paid up in July – ISK 28 bn. • 50% of bond issuance in USD from 2011 was bought back this year – ISK 67 bn. • These measures reduces debt-to-GDP ratio by ca. 5% 97 fjarlog.is Budget Proposal 2016 • Polish loan was pre-paid in May – ISK 7.5 bn. FUNDING AND DEBT MANAGEMENT • All of the major rating agencies, Moody´s, S&P and Fitch upgraded Iceland by one notch this summer • Successful liberalization of the capital controls will most likely result in further positive rating developments • Improved rating • Lowered funding cost 98 fjarlog.is Lowered funding cost Improved overall balance Budget Proposal 2016 • Lower debt levels along with the strategy on lifting capital controls have had positive effects on ratings GROSS DEBT AND NET FINANCIAL POSITION ISK bn. % of GDP 2,000 100.0 90.0 1,500 70.0 1,000 60.0 500 50.0 40.0 0 30.0 20.0 -500 10.0 -1,000 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Gross debt. (l.ax.) 99 fjarlog.is Net financial position (l.ax.) Debt-to-GDP.(r.ax.) Budget Proposal 2016 80.0 REDUCTION OF TOTAL DEBT* Other debt ISK 371 bn. ISK 1.177 bn. ISK 216 bn. Sales proceeds of Landsbanki ISK 71 bn. Recapitalization of financial institutions ISK 142 bn. * Total debt is estimated at ISK 1.177 bn. at year-end 2016 100 fjarlog.is Foreign reserve loans ISK 304 bn. Budget Proposal 2016 Recapitalization of Central Bank ISK 145 bn. Accumulated funding of fiscal deficit ISK 360 bn. FUNDING AND DEBT MANAGEMENT • Sale of 30% of Treasury´s stake in Landsbanki will be sold and proceeds used to pay down related debt ( RIKH 18) • Central Bank bond will be paid up in first half of 2016 • The first part of stability contribution / tax will be used for that • Debt-to-GDP is estimated at 50% at year end 2016 101 fjarlog.is Budget Proposal 2016 • Further debt reduction is forecasted in 2016 DEBT COMPOSTION AFTER MEASURES TAKEN* Other debt ISK 371 bn. ISK 1.177 bn. Recapitalization of financial institutions ISK 142 bn. * Estimated composition year-end 2016 102 fjarlog.is Foreign reserve loans ISK 304 bn. Budget Proposal 2016 Accumulated budget deficit ISK 360 bn. INTEREST BALANCE • Interest balance is assumed to be negative by ISK 59 bn. or 2.7% of GDP at the end of 2015 • Forecasts assume rising interest rates, higher inflation and depreciation of the krona • Interest balance deficit is projected at 2.1% of GDP at the end of 2017 • Further improvement is expected and in 2018 the interest balance deficit is forecasted at 1.9% of GDP and 1.6% of GDP at year-end 2019 103 fjarlog.is Budget Proposal 2016 • Lower interest expense improves the interest balance, interest income is more stable INTEREST BALANCE 2009 - 2019 ISk bn. 120.0 100.0 60.0 40.0 20.0 0.0 -20.0 -40.0 -60.0 -80.0 2009 2010 2011 2012 Interest expense 104 fjarlog.is 2013 2014 2015 Interest revenues 2016 2017 Interst balance 2018 2019 Budget Proposal 2016 80.0 INTEREST EXPENDITURE • Interest expense in 2019 are around ISK 16 bn. lower than in 2014 • Pre-payment of debt and refinancing contribute to the majority of the reduction in interest expense • Diminishing domestic issuance also contributes to lower expenses 105 fjarlog.is Budget Proposal 2016 • Interest expense will be reduced in the next few years TREASURY’S INTEREST EXPENDITURE 2007-2019 % of GDP 6.0 84 80 76 68 70 79 74 77 74 68 66 5.0 69 63 60 4.0 50 3.0 40 35 30 2.0 22 20 1.0 10 0 0.0 2007 2008 2009 2010 2011 2012 Interest expenditure, ISK bn. (l.axis) 106 fjarlog.is 2013 2014 2015 2016 2017 2018 Interest expenditure, % of GDP (r.axis) 2019 Budget Proposal 2016 ISK bn. 90 INTEREST REVENUES • Interest revenues decreases because of pre-payment of Polish loan as well as Arion banki’s payment on part of the subordinated loan Treasury granted • Lower interest revenues are expected in relation to lower levels of deposits but is partly offset by higher policy rates • Interest revenues are fairly stable during the forecast period 107 fjarlog.is Budget Proposal 2016 • Interest revenues are interests from tax revenues, loans and deposits » Medium Term Debt Management strategy describes the objectives of DM and guidelines followed and is reviewed and updated annually » The main objective is to ensure that financial needs and obligations are met with lowest possible cost that is consistent with a prudent risk policy » Efforts are made to have the maturity profile of securities issued as even as possible » The strategy is intended to encourage further development of efficient primary and secondary markets for domestic bonds » Principal guidelines relates to the maturity profile, benchmark series, degree of refinancing and maturity 108 fjarlog.is Budget Proposal 2016 DOMESTIC DEBT MANAGEMENT STRATEGY REDEMPTION PROFILE – DOMESTIC DEBT ISK million 300,000 200,000 150,000 100,000 50,000 0 Govenment bonds Recapitalisation of financial institutions Recapitalisation of the Central Bank Government guarantees Other domestic loans fjarlog.is Budget Proposal 2016 250,000 » Treasury borrows in foreign currencies primarily to strengthen the CB´s foreign reserves » The strategy aims at maintaining access to international capital markets » Enhance the name recognition of the Republic as an issuer and appeal to a diverse group of investors » Regular issuance of securities in foreign markets is intended » Issuance of the Treasury lays the foundation for the access of domestic banks and firms to international capital markets » The necessity for international issuance is always carefully evaluated 110 fjarlog.is Budget Proposal 2016 FOREIGN DEBT MANAGEMENT STRATEGY REDEMPTION PROFILE – FOREIGN DEBT ISk million 140,000 100,000 80,000 60,000 40,000 20,000 0 2015 fjarlog.is 2016 2017 2018 2019 Currency reserve loans 2020 2021 2022 Other foreign loans 2023 2024 Budget Proposal 2016 120,000 ICELAND IN AN INTERNATIONAL COMPARISON BUDGET PROPOSAL 2016 7. ECONOMIC GROWTH IN 2014 AND FORECAST FOR 2015 GDP growth % 6.0 4.0 3.0 2.0 1.0 0.0 -1.0 2014 Source: IMF and Statistics Iceland 113 fjarlog.is 2015 proj. Budget Proposal 2016 5.0 ECONOMIC GROWTH 2008-2015 GDP growth % 6 2 0 -2 -4 -6 -8 2008 2009 France Source: IMF 114 fjarlog.is 2010 Germany 2011 Iceland 2012 2013 Netherlands 2014 Spain 2015 UK Budget Proposal 2016 4 UNEMPLOYMENT IN OECD COUNTRIES 3Q2015 % 30 20 15 10 5 0 ICE Source: OECD 115 fjarlog.is CAN NET OECD SWE FIN POL FRA EU EUR IRL ITA SPA GRE Budget Proposal 2016 25 0% 116 50% 40% 30% 20% 10% Source: OECD, september 2015 fjarlog.is Budget Proposal 2016 Mexico Norway Canada Sweden Australia Finland Iceland Turkey Austria Denmark USA Luxemburg Russia Switzerland OECD Netherlands UK Poland France Japan Lithuania Estonia Germany Czech rep. Rumenia Belgium EU Latvia Spain Hungary Slovenia Portugal Italy Ireland Croatia Slovak rep. Greece LONG TERM UNEMPLOYMENT IN 2013 % of unemployed 70% 60% INFLATION IN 2015 IN OECD COUNTRIES % 3 1 0 -1 -2 Source: OECD ,August 2015 117 fjarlog.is Budget Proposal 2016 2 GENERAL GOVERNMENT DEBT AND FINANCES OF A FEW EUROPEAN COUNTRIES IN 2014, % OF GDP 200 180 160 140 Portugal 120 100 Cyprus Italy UK 80 Iceland 60 Masstricht criteria 40 Denmark 20 Estonia 0 -10 -9 -8 -7 Source: OECD, September 2015 118 fjarlog.is -6 -5 -4 -3 -2 -1 General government balance (% af GDP) 0 1 2 3 Budget Proposal 2016 General government debt (% of GDP) Greece REAL EFFECTIVE EXCHANGE RATE 1994 -2014: COMPARISON WITH OTHER COUNTRIES 180 140 120 100 80 60 EUR Denmark Source: Eurostat, September 2015 119 fjarlog.is Finland Sweden Iceland Norway USA Budget Proposal 2016 160 NATIONAL SAVINGS 1980-2020 % of GDP 45 40 30 25 20 15 10 5 0 Denmark Finland Source: IMF, september 2015 120 fjarlog.is Iceland Norway Sweden UK Budget Proposal 2016 35 0.0 -2.0 -4.0 -6.0 -8.0 Source: Eurostat 121 fjarlog.is Budget Proposal 2016 Cyprus UK Finland Spain Croatia Bulgaria Slovenia France Sweden Poland Slovak rep. Netherlands Czech rep. EU Ireland Austria Belgium Latvia Portugal Rumenia Greece Luxemburg Estonia Malta Lithuania Hungary Italy Denmark Germany Iceland PRIMARY BALANCE – EU AND ICELAND 2014 % of GDP 6.0 4.0 2.0 GENERAL GOVERNMENT DEBT* – EU AND ICELAND 2014 % of GDP 200 180 140 120 100 80 60 40 20 Source: Eurostat 122 fjarlog.is Estonia Luxemburg Norway Sweden Denmark Finland Germany Iceland Netherlands * According to the Maastricht criteria UK EU France Spain Portugal Italy Greece 0 Budget Proposal 2016 160 123 fjarlog.is Source: Eurostat 8 6 4 2 0 Budget Proposal 2016 Estonia Luxemburg Sweden Finland Denmark Netherlands France Germany EU UK Greece Spain Italy Portugal Ireland Iceland INTEREST EXPENTITURE OF THE GENERAL GOVERNMENT – EU AND ICELAND 2014 % of GDP 12 10 GENERAL GOVERNMENT AND MUNICIPALITIES BUDGET PROPOSAL 2016 8. REVENUES OF MUNICIPALITIES 2014-2019 125 Proj. 2015 Proj. 2016 Proj. 2017 Proj. 2018 Proj. 2019 Total revenue ............................. 258,1 278,0 301,2 320,3 337,3 356,4 Tax revenue ................................ 191,7 208,4 226,7 242,2 255,9 270,4 T ax on revenue and profits ....... 157,9 171,9 187,4 200,4 211,7 223,8 T ax on assets ............................ 31,8 34,3 37,0 39,3 41,6 43,8 T ax on goods and services ......... 2,0 2,2 2,4 2,5 2,6 2,8 Contributions ............................ 28,9 29,7 31,7 32,4 33,3 35,3 O ther revenue ........................... 37,5 39,9 42,8 45,7 48,1 50,7 Revenue from assets .................. 10,3 10,7 11,2 11,8 12,1 12,4 Sale of goods and services .......... 26,3 28,3 30,6 32,8 34,8 37,0 Other revenue ........................... 0,9 0,9 1,0 1,1 1,1 1,2 Total revenue, % of GDP ........... 12,9 12,8 12,9 12,9 12,8 fjarlog.is Budget Proposal 2016 ISK bn. Acc. 2014 12,8 EXPENDITURES OF MUNICIPALITIES 2014-2019 Proj. 2015 Proj. 2016 Proj. 2017 Proj. 2018 Proj. 2019 Total expenditure ...................... 263,8 281,3 303,2 322,7 340,5 360,4 Wages ...................................... 205,7 220,3 238,3 255,1 270,0 286,0 Goods and services .................... 7,9 8,1 8,3 8,4 8,6 8,6 Interest expenditures ................ 27,7 29,4 31,7 33,6 35,3 37,1 Transfers and subsidies .............. 22,4 23,5 24,9 25,7 26,6 28,7 Total expenditure, % of GDP ... 13,2 13,0 13,0 13,0 12,9 12,9 126 fjarlog.is Budget Proposal 2016 ISK bn. Acc. 2014 FINANCIAL BALANCE OF MUNICIPALITIES 1990-2019 Balance % of GDP 3.0 Rev., exp. % of GDP 16.0 2.0 12.0 1.5 10.0 1.0 8.0 0.5 6.0 0.0 -0.5 4.0 -1.0 2.0 -1.5 0.0 -2.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Operating balance (r-axis) 127 fjarlog.is Total balance (r-axis) Revenue (l-axis) Expenditure (l-axis) Budget Proposal 2016 2.5 14.0 NET FINANCIAL ASSETS OF A-PART OF MUNICIPALITIES % of GDP 15.0 10.8 10.3 10.3 9.8 9.3 9.0 8.9 8.6 8.8 8.6 8.0 7.7 7.2 6.8 6.4 6.0 3.0 0.0 -1.4 -3.0 -2.6 -1.3 -3.7 -3.9 -3.6 -3.9 -4.0 -6.0 -5.4 -5.8 -6.1 -6.6 -6.0 -6.0 -9.0 -9.9 -12.0 -12.1 -12.9 -15.0 -12.6 -12.9 -12.8 -14.0 -13.7 -14.2 -13.9 -13.8 -13.8 -12.8 -12.4 -18.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Financial assets 128 fjarlog.is Debt Net financial assets Budget Proposal 2016 12.0 129 % of GDP Acc. 2014 Proj. 2015 Proj. 2016 Proj. 2017 Proj. 2018 Proj. 2019 Total revenue .......................... 45,6 43,4 42,2 41,7 40,6 40,6 T ax revenue .......................... 35,3 33,4 33,1 32,8 31,8 31,9 Social security contribution .... 3,7 3,7 3,7 3,7 3,7 Contributions ......................... 0,1 0,1 0,1 0,1 0,1 Other revenue ........................ 6,6 6,2 5,3 5,1 5,0 Total expenditure ................... 45,2 43,3 41,8 40,5 39,9 39,0 Operating expenditure ........... 44,4 42,7 41,5 40,1 39,4 38,5 Investment expenditure ......... 0,8 0,6 0,4 0,4 0,4 0,5 Investment ........................ 2,8 2,4 2,2 2,2 2,1 Depreciation ...................... -2,0 -1,9 -1,8 -1,8 -1,7 -1,7 Total balance ........................... 0,5 0,1 0,3 1,2 0,7 Budget Proposal 2016 GENERAL GOVERNMENT FINANCES 2014-2019 1,5 fjarlog.is 3,7 0,1 4,9 2,2 GENERAL GOVERNMENT BALANCE 1998-2019 Rev., exp. % of GDP 60.0 Balance % of GDP 9.0 4.4 6.0 4.9 54.0 48.0 45.0 1.2 0.7 1.5 0.5 0.1 0.3 0.8 1.3 51.0 -0.6 -1.7 -2.8 -3.1 -3.0 -3.7 -6.0 -5.6 39.0 -9.0 36.0 -9.7 -9.7 -12.0 33.0 -13.1 30.0 1998 2000 2002 2004 Total balance (r-axis) 130 0.0 -0.3 -0.9 42.0 3.0 fjarlog.is 2006 2008 -15.0 2010 2012 Revenue (l-axis) 2014 2016 2018 Expenditure (l-axis) Budget Proposal 2016 5.8 57.0 FISCAL OUTLOOK – OTHER ASPECTS BUDGET PROPOSAL 2016 9. MAIN WEAKNESSES » Expenditures as % of GDP are historically low and are projected to be restrained for the coming years » Liberalization of capital controls 132 fjarlog.is Budget Proposal 2016 » Indebted Treasury and significant interest balance deficit MAIN STRENGTHS » Stable and positive economic prospects in the mediumterm » Considerable assets that partly offset the debts of the Treasury » Fully funded private pension system » Renewable natural resources 133 fjarlog.is Budget Proposal 2016 » Favorable demographics