Iceland: Selected Issues

This Selected Issues paper focuses on the European Monetary Union and the monetary policy framework in Iceland. It concludes that in terms of an exchange rate regime, the two most realistic options for Iceland are to continue with the existing arrangement or adopt a unilateral peg to the euro. However, it is argued that both options entail the need for enhancing the independence of the central bank, which will require reforming the Central Bank of Iceland Act. The paper also discusses a Scandinavian forecasting model for inflation in Iceland.

Abstract

This Selected Issues paper focuses on the European Monetary Union and the monetary policy framework in Iceland. It concludes that in terms of an exchange rate regime, the two most realistic options for Iceland are to continue with the existing arrangement or adopt a unilateral peg to the euro. However, it is argued that both options entail the need for enhancing the independence of the central bank, which will require reforming the Central Bank of Iceland Act. The paper also discusses a Scandinavian forecasting model for inflation in Iceland.

VI. FISCAL DEVELOPMENTS AND POLICIES1

165. This chapter analyses recent fiscal developments, policies and issues. Section A describes Iceland’s fiscal performance in recent years with an emphasis on policies and the budgetary outcome for 1998. Section B presents the 1999 budget bill. Recent modifications of the tax system are outlined in Section C. Finally, some other public sector policies are discussed in Section D.

A. Recent Fiscal Developments

Background

166. Iceland’s recent fiscal performance has been generally favorable by international standards. Since 1991, the emphasis has been on containing public expenditures, correcting fiscal imbalances and reducing the government’s involvement in the economy. Iceland’s general government deficit averaged 3½ percent of GDP over 1990–1995, in line with the OECD average and well below the European Union average of 5 percent (Figure 14). In the most recent three years, the balance has improved further, resulting in a small surplus in 1998. This fiscal performance contrasts with the sharp deterioration in Iceland’s public finances during the 1980s, which contributed to a rapid rise in net Treasury debt from about 5 percent of GDP in the mid-1980s up to 35 percent by 1993.

Figure 14.
Figure 14.

Iceland: Fiscal Balances, 1982–1999

Citation: IMF Staff Country Reports 1999, 068; 10.5089/9781451819212.002.A006

Source: National Economic Institute, and Central Bank of Iceland

167. Fiscal consolidation tended to lag behind the authorities’ objectives in the first half of the 1990s. The overshooting of the deficit was due in part to stagnating activity in the early 1990s. Growth in health and social security outlays was rapid and fiscal concessions were granted in connection with centrally negotiated wage agreements. Moreover, current transfers rose by over a percentage point from the late 1980s to around 8 percent of GDP in 1993–95, at the same time that unemployment peaked.

168. General government gross debt doubled from about 30 percent of GDP in 1987 to a peak of around 60 percent in 1995, reflecting persistent deficits and stagnating activity; the devaluations of 1992 and 1993 also substantially raised its foreign-currency–denominated component. Extensive recourse to foreign financing in 1994–95, consistent with the government’s policy of maintaining low domestic interest rates at that time, contributed to raising its foreign component further, to 29 percent at the end of 1995, one half of the total outstanding debt.

169. In 1995, the new government made the strengthening of public finances one of its priorities and adopted an ambitious medium–term fiscal consolidation plan. At that time, modest prospects for growth, strong pressures for social expenditures, and high borrowing costs were contributing to a disquieting medium-term fiscal outlook.

170. A baseline scenario prepared by the Ministry of Finance on the basis of unchanged laws and regulations as of 1995 projected increased Treasury revenue deficits. The fiscal consolidation plan targeted a halving of the Treasury deficit in 1996, achieving a balanced budget in 1997 and a small surplus in later years. The plan emphasized expenditure restraint and structural changes, with various measures aimed at reducing transfer payments and capital expenditures in 1996, and plans to curb public consumption and transfers in 1997 and beyond. The plan was thus aiming at a reduction of Treasury expenditure by 3 percentage points of GDP from 1995 to 1999 (then projected at 24 percent of GDP), allowing a gradual decline of central government debt to 40 percent of GDP by the end of the century.2

171. This medium-term plan has been broadly achieved (Table 24). The deficit was reduced by more than half in 1996 (after adjusting for an early redemption of Treasury bonds that increased expenditure on a cash basis), and a small surplus was achieved by 1997. Central government debt has been reduced from a peak of 51 percent of GDP in 1995 to 39 percent of GDP in 1998.

Table 24.

Iceland: Treasury Finances, 1995–1999

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Source: Ministry of Finance of Iceland.

Additional interest costs, on a cash basis, due to the early redemption of Treasury bonds.

172. Progress towards fiscal adjustment was mainly achieved through a reduction of the expenditure to GDP ratio (Table 25). As economic activity picked up, current transfers fell. In addition, there was a reduction in capital expenditures—which had been increased temporarily to stimulate activity during the downturn—and through cuts in net capital transfers. Subsidies declined steadily over the 1990s. The sharp reduction in public debt led to lower interest payments. Partly offsetting these declines in expenditure components to GDP, the ratio of public wages to GDP increased by 2 percent of GDP over the 1990s.

Table 25:

General Government Finances 1988–1999

Percent of GDP; Accruals basis

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Sources: National Economic Institute, Central Bank of Iceland

173. On the revenue side, the main development was the change in the tax structure—increasing the proportion of direct taxes (Figure 15). Indeed, in the first half of the 1990s, Iceland collected a much larger share of its tax revenue from domestic taxes on goods and services and from import duties compared to other OECD countries, and a correspondingly lower share from taxes on income, profits, capital gains, and social security (Table 26).

Figure 15.
Figure 15.

Iceland: General Government Fiscal Composition

Citation: IMF Staff Country Reports 1999, 068; 10.5089/9781451819212.002.A006

Source: National Economic Institute
Table 26.

OECD Countries: Tax Structure, 1990–95

(In percent of total tax revenue)

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Sources: IMF, Government Finance Statistics; and International Financial Statistics.

The budgetary outturn in 1998

Overall balances

174. Against the background of fiscal consolidation achieved in the prior two years, the Treasury Budget for 1998 targeted an increased surplus on a cash-basis reflecting a decline in the expenditure ratio by ¼ percent of GDP. Treasury finances improved in 1998, although by less than warranted by cyclical conditions. As part of an effort to sharpen government financial management, the accounting practices underlying the budget presentation have been revised. The 1998 budget consolidated some previously off-budget items and was

175. presented on an accruals basis, creating a break in the series of government finances.3 On an accrual basis, the treasury balance for 1998 is expected to be in deficit by ½ percent of GDP compared with a balanced 1998 Budget.

176. On a cash basis, Treasury finances are significantly stronger. Accrued payments, such as for future pension liabilities, exceed cash outlays by some 2¼ percent of GDP. Combining this adjustment with financial transactions such as the revenue from the sale of government assets, the net financial balance (public sector borrowing requirement) of the treasury is estimated to show a surplus of 15 billion kronur (2½ percent of GDP), sharply higher than the budgeted financial surplus of around 1 percent. Of this amount, 10 billion was used to repay foreign debt; 2–3 billion was used to repay domestic debt; and the remainder augmented the Treasury’s cash position at the central bank. Gross Treasury debt declined by 10 percentage points of GDP from 1996 to 1998.

Revenue

177. Treasury revenue is expected to improve by ¼ percent of GDP compared to the 1998 budget assumption, mainly due to higher revenue indirect taxes, such as the VAT, and from personal income tax receipts (individual income taxes and social security taxes). This improvement reflects the strong cyclical position of the economy in 1998. Although the 1998 revenue estimate is subject to greater uncertainty as a result of the change in accounting standards, preliminary cash flow data for the 1998 outturn is consistent with the projections presented in the Budget proposal in October 1998.

178. The increase in receipts from taxes on goods and services is attributed mainly to higher VAT collections. As in the past, domestic VAT collections were slightly lower than expected in the budget, although they appear to be more in line with budgetary expectations than in previous years.

179. The boost in revenue from personal income taxes stems from the effects of higher domestic demand on incomes. Indeed, tax returns have thus far confirmed the higher estimate relative to previous projections. The cyclical effect on income tax revenue thus more than compensated for the lower income tax rate in 1998. This revenue item is particularly buoyant owing to the structure of income taxes—a high income threshold combined with high marginal tax rates. Indexation of tax brackets to inflation had been abolished a few years ago, although the budget assumed that the tax credit for 1998 would increase by 2½ percent based on the expectation for inflation. The cut in the personal income tax rate by 1.9 percent in 1998 was the second in a three year program of income tax rate reductions. The revenue loss from this change is estimated at 3 billion kronur. Revenue from corporate taxes is estimated at 7 billion kronur. Companies had previously been permitted to subtract 7 percent of the face value of shares outstanding. Effective 1999, this allowance was abolished, but was offset by a reduction of the corporate tax rate to 30 percent from 33 percent.

180. Revenue from the sale of public assets is below earlier forecasts since the sale of Iceland Prime Contractors has been postponed until 1999. Revenue for 1998 mainly reflects profits from the sale of 49 percent of government owned shares in the new investment bank—roughly one third is included as revenue and the other two thirds is shown below the line. Assets in a number of other companies have also been sold on the market.

Expenditure

181. Total expenditure was ¾ percent of GDP higher than budgeted in 1998. The expenditure overrun mainly reflects higher-than-expected future pension liabilities following a restructuring of public sector wages, which affect the budget on an accruals basis. This source accounted for 9 billion kronur of the 12 billion kronur overrun. The remainder of excess expenditure owes mainly to a higher wage bill and higher operating costs in hospitals. However, with strong economic activity, transfer payments were lower than budgeted due to the decline in unemployment relative to the rate that had been projected in the budget. The reduction in total public debt reduced interest expenditures.

182. Agricultural subsidies represent a transfer from the government to farmers for production quotas, and are intended to provide income support as agricultural wages have not kept pace with wage growth in other sectors. Other subsidies and transfers include an electricity subsidy intended to equalize electricity prices across regions. The Municipal Equalization Fund is part of regional management policy, in which funds are directed to municipalities to assist small communities with the provision of services, including primary education, the responsibility for which was transferred to the local government. Interest rebates are provided as a subsidy to home ownership and is income-and wealth-tested with a limit related to the debt on the property. This rebate on interest paid for residential mortgages has an individual maximum of 140,000 krónur per year, covering about 50,000 (mainly young) individuals.

General government

183. General government finances continued to improve in 1998, reflecting mainly the revenue impact of the economic upswing. The general government balance is expected to be in surplus by ½ percent of GDP in 1998, compared with a balanced position in 1997. The improvement in recent years can be attributed primarily to a steady decline in the expenditure to GDP ratio from 1992, mainly on account of lower interest payments, operating subsidies, and public investment expenditure. The local government financial balance for 1998 is estimated to be in deficit by ¼ percent of GDP. The share of local government in general to GDP ratio from 1992, mainly on account of lower interest payments, operating subsidies, and public investment expenditure. The local government financial balance for 1998 is estimated to be in deficit by ¼ percent of GDP. The share of local government in general government expenditures has risen by about 5 percentage points to about 27 percent of general government expenditures due to the transfer of responsibility for primary education from the central to the local government.

B. Fiscal policy and outlook

The budget for 1999

184. The treasury revenue balance is budgeted to be in surplus by ½ percent of GDP, an improvement of 1 percent of GDP relative to the 1998 estimated outturn. This 2.4 billion krónur balance reflects a reduction in the expenditure-GDP ratio of 1 percent of GDP, and an unchanged revenue-GDP ratio. The net financial balance4 is budgeted to show a surplus of 16.7 billion krónur (2¾ percent of GDP), to be used to reduce gross Treasury debt by 5½ percent of GDP. The government intends to repay domestic debt of roughly 10 billion krónur and foreign debts amounting to 5 billion kronur. Indeed, reduction of foreign debt is considered a long-run objective, partly to enhance the country’s credit rating. In addition to debt reduction, the Treasury intends to use part of the cash flow to contribute to public pension liabilities. Despite the large reduction in debt, the Treasury also intends to issue new debt in the amount of 8.5 billion kronur. Government paper plays an important role in the financial markets, and the intention is to maintain strong benchmark issues.

185. The Treasury will take on additional guarantees of around 50 billion krónur,5 of which the Mortgage Fund for residential housing is the largest element. Liabilities of the Mortgage Fund are domestic, whereas the liabilities of the State Power Company, the second largest component of guarantees, are foreign. Annual fees are charged on loans from this Fund which contribute to an insurance facility. There are also indirect guarantees, mostly to banks. No budgetary spending has been needed to meet any of the guarantees in recent years.

Revenue

186. Total Treasury revenue is budgeted to increase in line with GDP. Other than the third and final reduction in the personal income tax rate approved in 1997, no major change will be made to the tax structure. The revenue loss from the reduction in the personal income tax rate is expected to be 1.5 billion krónur—expected to be more than outweighed by rises in personal incomes in 1999. The growth in corporate income tax receipts reflects continued economic buoyancy. Strong economic growth is also expected to generate increases in revenue from wealth taxes, social security taxes, and taxes on goods and services.

187. The government has been promoting policies to increase private savings. A commission set up to recommend ways of increasing savings proposed two tax measures that would increase incentives to save. A very popular measure permits an additional 2 percent of income, beyond the previous 4 percent, to be tax exempt if contributed to any pension fund. If the full 2 percent of income is contributed to a pension fund, the employer would be obliged to contribute an additional 0.2 percent of income, to be refunded from the employer’s payment of social security taxes. Based on an expected participation rate of roughly one half of employees, the revenue loss from this measure is estimated at 200–300 million krónur for 1999. This measure is expected to have a small positive effect on private savings. Another measure to improve savings is the cancellation of the phasing out of a tax credit for the purchase of equity. A tax credit of 60 percent of the value of equity purchases up to a maximum of 260,000 kronur per year (per person) had been planned to be phased out by the year 2000. The revenue loss for 1999 from this measure is also expected to be approximately 200–300 million krónur.

188. Revenue from the sale of public assets is expected to increase to 3.7 billion kronur (0.6 percent of GDP) in 1999 from 2.6 billion kronur in 1998. This revenue includes the sale of the remaining 51 percent of shares in the Icelandic Investment Bank, and the sale of Iceland Prime Contractors. Overall proceeds from the sale of public assets are expected to yield a total of 8.3 billion kronur, of which 7 billion is from the investment bank. Most of the proceeds will be recorded as financial transactions—only the profits above book value will be included as revenue.

189. Dividends and other property income include the payment of dividends to the government by the National Bank of Iceland in 1999. A decision to require dividend payments likely reflects the partial ownership of shares by the public—market-like conditions are considered desirable—but also is a means to control lending by reducing bank liquidity from retained earnings. The Agricultural bank will also pay higher dividends.

Expenditure

190. Total expenditure is budgeted to increase to 182.4 billion kronur (29¼ percent of GDP) in 1999 from an estimated outturn of 177.7 billion krónur (30¼ percent of GDP) in 1998. The main pressures for increased spending are for salary increases, especially in health care and education. Salaries account for some ¾ of operating expenditure. Although public sector contracts will not be renegotiated in 1999, wage drift in the private sector has put pressure on public sector wages. Estimates of public sector wage drift range between 1–3 percent. Agreements for hospital staff salaries have been in place since the end of 1997, but a series of strikes in 1998 has resulted in pay rises.

191. Transfer payments are budgeted to decline as the projected fall in the unemployment rate from buoyant economic activity in 1999 leads to lower unemployment insurance payments.

192. Tax write-offs are expected to amount to 4 billion krónur. These items represent unrealistic levies on companies that have either gone bankrupt or have not earned income as high as estimated. High estimated levies are also used as a measure to improve tax administration by encouraging quick tax filing.

General government

193. The general government balance is expected to be in surplus by ¾ percent of GDP, representing an improvement by ¼ percent of GDP relative to the 1998 projected outturn. The weaker improvement in the general government balance compared to the central government balance stems from the smaller cyclical benefits accruing to local governments. The improved public finances will be used to reduce gross general government debt to 40¾ percent of GDP from a peak of 59¼ percent of GDP in 1995.

C. Recent modifications of the tax system

194. Over the past decade, the tax system has undergone comprehensive reforms aimed at achieving several objectives:

  • To foster international cooperation and strengthen the competitiveness of Icelandic firms by aligning the tax system with other OECD countries.

  • To improve incentives to work and save by reducing distortions in taxes on capital income, personal income, and means-tested benefits.

  • To enhance the role of automatic stabilizers by shifting to direct from indirect taxation, which earlier accounted for three-fourths of central government revenue.

195. The corporate income tax system has been made more flexible and integrated with that of other European countries. The corporate tax rate has been lowered from 51 percent in 1989 to 30 percent in 1999, while various exemptions have been abolished, and the tax base widened. In addition, the period for which trading losses can be carried forward has been extended from 5 to 8 years, and depreciation rules made more flexible. A four step plan to harmonize the two-tier social security tax across industries will be completed in the year 2000. Finally, various changes to the system of excise duties, including a reduction in the

196. Tax distortions on capital income have been reduced by applying a uniform 10 percent tax rate on all forms of capital income (interest, dividends, capital gains and rent) in place of the previous system which exempted some forms while taxing other forms at the 42–47 percent personal income tax rate. The partial tax deductibility of dividends at the corporate level has been abolished. Personal income tax rates have been reduced by 4 percent over a period of three years and numerous exemptions and deductions have been abolished. These measures helped reduce distortions in the system which featured high marginal tax rates, but low average tax rates. For equity considerations, the child benefit system was fully means tested.

The social security tax

197. The social security tax has been levied at two different rates. At the end of 1996, the lower rate was 3.55 percent on agriculture, fisheries, manufacturing, hotels and restaurants, rental of cars and computer services, and 6.85 percent on other sectors, for an average rate of around 5½ percent. On January 1, 1997, the first of four steps to harmonize the two-tier system of the social security tax became effective. The unified rate will be 5½ percent for all industries when fully implemented in the year 2000, and the change will be revenue-neutral. Revenue from the social security tax is received by the Unemployment Insurance Fund (1.3 percent of the tax base), and the Occupational Safety and Health Administration (0.08 percent of the tax base), and the remainder is channeled to the social security system, for financing pension and insurance payments.

The personal income tax

198. By 1997, the two main features of the personal income tax system were a low average tax rate, but a fairly high marginal tax rate at low levels of income reflecting extensive tax credits and means-tested benefits. In 1988, an old system of personal income taxes levied and collected on the basis of the previous year’s income was replaced by a Pay-As-You-Earn (PAYE) system. Furthermore, the tax system was simplified by abolishing numerous exemptions and deductions and thus broadening the tax base. However, changes in the tax structure over the years heightened the disincentives to work. The basic personal income tax rate had crept up to almost 42 percent by the beginning of 1997 (constituting a central government tax rate of 30½ percent and a local government rate of 11½ percent), and a 5 percent surtax on higher incomes raised the effective marginal tax rate to 47 percent for higher income individuals. Moreover, a basic tax credit amounting to 24,544 kronur per month, which was transferable between couples up to a maximum of 80 percent, was deductible from the taxes levied. In effect, a one-earner couple with monthly earnings below 105,000 kronur (about $1,500) paid no personal income tax, but all income above this threshold was taxed at 42 percent. This tax structure created significant work disincentives. In addition, there were two kinds of means-tested benefits related to the personal income tax system, child benefits (about $1,500) paid no personal income tax, but all income above this threshold was taxed at 42 percent. This tax structure created significant work disincentives. In addition, there were two kinds of means-tested benefits related to the personal income tax system, child benefits and interest rebates,6 with marginal effects as high as 21 percent. The relative weight of means-tested child benefits had increased rapidly, accounting for about a half of the total child benefits by 1997.

199. In March 1997, the personal income tax system was changed to reduce these distortions. A reduction in the personal income tax by 4 percent took effect in three stages. The tax rate was lowered by 1.1 percent on May 1, 1997, a further 1.9 percent on January 1, 1998 and a final 1 percent on January 1, 1999. The personal income tax threshold remained unchanged, as the tax credit per individual was lowered simultaneously with the reduction of the tax rate. However, for equity considerations, the surtax on high incomes was raised to 7 percent in 1998. The income limits for the surtax were raised by about 11 percent. The revenue loss due to the tax reduction was expected to be financed by phasing out a special tax rebate for purchases of shares, a new consolidated tax on capital income, and the freezing of all tax credits and benefits in 1997.

200. Child benefit payments earlier consisted of a lump-sum benefit that depended on family characteristics, and supplementary benefit that was means tested to income and net wealth. As of January 1, 1998, all benefits became means-tested, leading to a loss of benefits for high income families. The changes were tax neutral. Savings incurred by this change were used to reduce the marginal income losses implied by the system, from 15 percent to 11 percent for families with three or more children, from 11 to 9 percent for for families with two children and from 6 to 5 for families with one child.

Taxation of capital income

201. As of January 1, 1997, a consolidated tax on capital income became effective. This change overhauled the former system of capital taxation, which featured large discrepancies of tax rates on different forms of capital income. Interest income had been tax exempt, while other capital income was taxed at rates up to the 42–47 percent personal income tax rate. These discrepancies distorted the saver’s choice of savings vehicle, especially encouraging the use of debt over equity. In 1997, a general 10 percent withholding tax was levied on interest income and capital gains. Consequently, all capital income, has been taxed at a uniform nominal rate of 10 percent. Additional revenues from the consolidated capital income tax were used to help finance the lowering of the personal income tax.

Excise duties

202. The system of excise duties was changed in 1996 in order to comply with an EEA Agreement. The 25 percent estimated mark-up on wholesale prices of imported goods was abolished, while the collection rules on imported goods and domestic products were harmonized. These changes also reduced the number of rates to four from six, ranging from 15–30 percent on the c.i.f. or product value except on a few items where the ad valorem duty was replaced by a quantity charge. Further adjustments to the excise duty system took effect at the beginning of 1997. The general rate of excise on goods was lowered to 25 percent from 30 percent, while the excise rate on spare parts for automobiles was lowered to 15 percent from 20 percent, and excises on cosmetics, films for photography, pens and pencils were abolished, except on candy, soft drinks and several food products where the ad valorem duty was replaced by a quantity charge.

D. Other reforms in the public sector

Public pension reform

203. The government carried out a fundamental revision of its pension system with the Government Employees Pension Fund Act that became effective at the beginning of 1997. The basic aim of the reform was to contain the growing deficit of the system and introduce a new, fully funded pension scheme. The new act limited access to the existing pension fund to existing members. A new fund was established for new entrants and those who wished to transfer from the old system.

204. The two pension funds are considerably different in structure. Premiums to the old pension fund are based on each employee’s base pay, with a 4 percent contribution from the employee and a 6 percent contribution from the government. Premium contributions are paid on basic pay, not on emoluments such as overtime. The employee’s pension is linked to the basic pay of his or her successor. On average, the pension payment amounts to about 65–70 percent of earnings. In recent years base pay has tended to be only a portion of total pay; for higher pay grades, base pay is often less than half of total pay. This has meant that higher- grade employees receive a lower replacement ratio when they retire, a drawback is being corrected under the new system. Although contributions still exceeded disbursements on a cash basis, an actuarial assessment revealed that the fond had accumulated a shortfall of some 80 billion kronur on an accruals basis, a debt guaranteed by the Treasury.

205. The new pension fund has a very different structure. Premiums are paid on total pay (base pay, overtime and all other emoluments). Employees and the government contribute 4 percent, and 11.5 percent, respectively. The government guarantees the solvency of the fund and pays annually any shortfall that may arise, based on actuarial evaluations. For the first three years, the government’s contribution is 11.5 percent and thereafter it will be determined annually, based on actuarial calculations. Pension payments at retirement are linked to the employee’s prior contributions. Pensions are also tied to the consumer price index and not based on the public employee pay index, as in the old pension fund.

206. Government pension costs associated with the old pension fund have risen as a result of salary agreements that were concluded with public employees early in 1997. One of the most important provisions of the agreement is related to the restructuring of the salary system for government employees. The supplementary component of the government salary system has become progressively larger over time, particularly for higher pay grades. The salary agreement stipulated that the supplementary portion would gradually be transferred into basic pay. This meant that actual take-home pay of active employees would not change, but the calculation base of the pension contribution would rise. Both employees and the government would pay higher premiums. Since the pension payments to government pensioners of the old fund were tied to the basic salary of the post which they occupied at the time of their retirement (the successor rule), government costs for their pensions increased in line with the transfer of supplemental pay into basic pay.

207. The wage agreements stipulated that the additional agreements involving the transfer of supplemental pay into basic pay was to be finalized by the end of 1997 and hence that the consequent increase in pension liabilities would be accounted for in that year. Therefore, the 1998 budget only allowed for an increase in pension liabilities in line with general wage increases. As it turned out, however, the additional agreements were concluded in 1998. This explains the bulk of the upward revision of pension liabilities for 1998.

Privatization

208. Public enterprises in Iceland account for over 30 percent of GDP. The state owns two of the three major commercial banks, various other financial institutions and funds as well as several manufacturing and service industries. Hospitals, schools, the energy industry, and the Post and Telecommunications monopoly are also public property. Recent governments have emphasized a policy of privatization of enterprises owned by the state. The main objectives of privatization are: to increase economic efficiency by eliminating the distortions inherent in state-ownership; To widen share ownership and encourage development of the Icelandic stock market; to raise capital for the Treasury and support industrial development. Revenues from the privatization program are an important element of the strategy to reduce the budget deficit and repay public debt. However, the government has decided to use on fifth of revenues from sales of privatized companies to support R&D in Iceland and thereby promote industrial development.

209. Several state enterprises have already been sold to the private sector. The privatized enterprises include a venture capital institution, a fish processing company, a fish meal company, a coastal shipping line, and a machinery and heavy equipment plant. The state-owned and operated Vehicle Inspectorate, was incorporated and privatized. In 1997 the government and the City of Reykjavik privatized a joint computer data center. In 1997 the government agreed to sell part of the ferrosilicon plant at Grundartangi to one of its co-owners, a Norwegian firm. In addition, the state-owned Post and Telecom Iceland was incorporated and divided into two entities in the beginning of 1998, a postal company and a telecom company.

210. The government’s plan for privatization in 1999 includes sale of the remaining shares of Icelandic Investment Bank Ltd. and Icelandic Prime Contractors Ltd., and sale of 25 percent of the shares of a cement manufacturer. In addition, it plans to privatize several other companies, including a fertilizer manufacturing firm, a recycling company, and internet company, and two fish breeding plants.

Table 27:

Central Government and Social Security Finances 1989–1999

Percent of GDP; Accruals basis

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Sources: National Economic Institute, Central Bank of Iceland
Table 28:

Local Government Finances 1989–1999

Percent of GDP; Accruals basis

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Sources: National Economic Institute, Central Bank of Iceland

STATISTICAL APPENDIX

Table A1.

Iceland: GDP and Expenditure Components 1/

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Source: National Economic Institute.

Volume changes in 1992 to 1996 are based on 1990 prices, but the forecast for 1997 and 1998 on previous year’s prices.

Percentage figures indicate contribution to GNP growth; i.e. changes in aggregates expressed as a percentage of GNP of the previous year, fixed prices.

Change as a percentage of GNP of previous year.

GNP adjusted for changes in terms of trade.

Table A2.

Iceland: Gross Fixed Capital Formation 1/

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Source: The National Economic Institute.

Volume changes are based on 1990 prices.

Official estimates and forecasts as of March 1998.

Including aquaculture.