Treasury Budget proposal in Iceland 2014

The Treasury Budget proposal for 2014 provides balanced Treasury operations for the first time since 2007. Stopping debt accumulation and achieving balanced public sector finances are the foundations of resilience.

The key objective of the budget proposal is to ensure improved living conditions for the people of Iceland. Real disposable income will rise by 0.3% in 2014 as a result of lower taxes. In addition, pensioners will benefit from increased social security system expenditures.

Over the next three years, the payroll tax will decline by 0.34 percentage points, providing firms with relief in the amount of ISK 3.8 bn by the time the changes have been implemented in full. In the long run, the payroll tax reduction will be of benefit to wage earners and will stimulate investment in the Icelandic economy.

The main element of fiscal policy is to reduce government debt, thereby reducing interest expense. The outlook is for a fiscal deficit of ISK 31.1 bn this year. This is substantially in excess of the estimate for 2013, which assumed a deficit of ISK 3.7 bn.

In the absence of targeted action, the fiscal deficit would have totalled some ISK 27 bn in 2014. Government expenditure will be reduced as a share of GDP through broad-based streamlining measures, decisions to abandon various recent projects undertaken by the previous government, and measures to cut interest expense.

Operating performance will also be improved through revenue-generating measures – in particular, the bank tax, which will be increased and will be imposed for the first time on financial undertakings in winding-up proceedings. Payments made by firms in winding-up proceedings will total an estimated ISK 11.3 bn in 2014, and total payments will amount to ISK 14.2 bn. This provides some scope for changes in focus, in line with the new government's policy.

Increased support for pensioners and safeguarding of children's benefits and interest cost rebates

• The budget proposal provides for ISK 5 bn in increased disbursements to recipients of old age and disability pensions and to social assistance programmes, due to various changes in these pensioners' entitlements. 
• Social security system disbursements will increase by an additional ISK 3.4 bn next year because of an increased number of benefit recipients and indexation of benefits. Spending in this category will therefore rise by a total of ISK 8.4 bn. 
• The increase in interest cost rebates for low-income homebuyers, which was due to expire at the end of the year, will be extended. 
• The recent increase in children's benefits is protected, in line with the government's policy of supporting families with children. Children's benefits rose by 24% in the 2013 Treasury Budget. Total expenditures for children's benefits are estimated at ISK 10.2 bn in 2014, as opposed to just under ISK 7.5 bn in 2012.

First steps away from increased taxation on individuals and companies 

• The tax rate in the middle income tax bracket will be reduced by 0.8%, bringing it closer to the lowest bracket.
• The combined percentage of employers' payroll tax and Wage Guarantee Fund contributions will decline by 0.1 percentage points. It will be cut by an additional 0.1% in 2015 and another 0.14% in 2016. 
• The tax-free threshold for financial income tax on individuals' interest income will be raised by 25%, from ISK 100,000 to ISK 125,000. 
• Value-added tax on disposable paper diapers will be reduced from the general rate of 25.5% to the lowest rate, 7.0%.

Further measures to assist households 

• The ceiling for maternity/paternity payments leave will be raised to ISK 370,000, but plans to lengthen maternity/paternity leave will be abandoned. 
• The “Allir Vinna” programme providing for reimbursement of value-added tax on labour related to construction and renovation of residential, vacation, and municipality-owned housing, which was due to expire at year-end 2013, will be extended. 
• The tax-free threshold for children's income will be raised from ISK 104,745 to ISK 180,000.
• Stamp fees on loan documents will be cancelled.

Contributions to various investment projects 

• Norðfjarðargöng tunnel 
• Bakki investment in infrastructure and road construction 
• Vaðlaheiðargöng tunnel 
• Prison construction at Hólmsheiði
• General transport construction projects

Source: Ministry of Finance

Iceland24, October 2013