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Cablegate: Tax Increases and Fiscal Cuts in Iceland's 2010 Budget

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TO RUEHC/SECSTATE WASHDC PRIORITY 4181
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INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

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TAGS: PGOV PREL ECON EFIN IC
SUBJECT: TAX INCREASES AND FISCAL CUTS IN ICELAND'S 2010 BUDGET
BILL

1. (U) Summary: The Minister of Finance announced next year's
economic forecast and submitted the 2010 state budget bill to
parliament October 1 when the parliament reconvened after its summer
break. The forecast presented a bleak economic picture for the next
two years and the budget was laden with significant tax increases
and budget cuts. The budget proposal is traditionally the first
bill to be submitted to parliament, and must pass before January 1
as the Icelandic fiscal year ends December 31. End summary.

Facts and Figures
----------------

2. (U) The Ministry of Finance recently announced the economic
forecast for Iceland, which serves as a basis for the calculation of
revenues and expenses in the 2010 state budget bill. The forecast
presented a bleak picture for the Icelandic economy in the next two
years. It noted that, despite a surplus of 88.6 billion ISK ($708
million USD) in 2007, the economic crisis created a deficit of 216.0
billion ISK ($1.73 billion USD), amounting to 42% of GDP in 2008.
The deficit is predicted to decrease slightly to 182.3 billion ISK
($1.46 billion USD) in 2009 and drop to 87.4 billion ISK ($699
million USD) in 2010. State coffers are not expected to post
positive gains until 2013, even with the assistance of stringent
fiscal restraint.

3. (U) The forecast predicted purchasing power to fall by 10.4
percent in 2009 and by 11.4 percent in 2010; and for GDP to contract
by 8.4 percent in 2009, a little less than previously expected, and
by 1.9 percent in 2010. Unemployment for 2009 is expected to reach
8.6 percent and grow to 10.6 percent in 2010, a significant rise in
a country where unemployment was about two percent before the
financial collapse.

Tax Increases
----------------

4. (SBU) According to the 2010 budget bill, the government's goal is
to reduce the deficit to 87.4 billion ISK ($699 million USD), or 6%
of GDP, in 2010, in part by increasing revenues by 61.3 billion ISK
($490 million USD), primarily through tax increases. Significant
income, fuel, alcohol and tobacco sales taxes are included among the
proposed tax increases. One prospective new tax being debated is an
energy, environmental, and resource tax, which could generate 16
billion ISK ($128 million USD) in revenue. Details on this proposed
tax are scarce; however, the bill mentions the option of imposing a
tax of one ISK per kWh of sold electricity. Aluminum companies are
greatly displeased with this possibility. As the three aluminum
smelters utilize 70 percent of all electricity in Iceland, this
could result in a significant blow to those companies' profits.
They are thus studying their long-term agreements with the
government to determine whether or not they would be exempt from the
tax. The spokesperson of one aluminum company, RioTintoAlcan,
stated that such a tax would wipe out all of the company's profits
from its aluminum smelter in Straumsvik. Alcoa's managing director
said this tax is directed towards companies creating jobs in Iceland
and that he doubts such a step would help the country in attracting
investors.

Budget Cuts
----------------

5. (U) To meet the goal of reducing the deficit to 87.4 billion ISK
($699 million USD) in 2010, the government also plans to implement
33.6 billion ISK ($269 million USD) in budget cuts next year. Among
the proposed reductions are cuts for all ministries and the closure
of three Icelandic embassies abroad. The reduction for the Ministry
of Health, which operates the public health sector, will amount to 4
percent. Investment in transportation and infrastructure will fall
by 33 percent. Allocations to the Icelandic Defense Agency (IDA)
will be reduced by 21.5 percent in advance of its anticipated
closure in 2010. Contributions to international development aid
will be cut by 24.3 percent and the budget of the Icelandic
International Development Agency will decrease by 16.1 percent.
Salary reductions for state employees, ranging from three to 10
percent, are rumored to be imminent.

Comment
----------------

6. (SBU) Although the government is taking steps to turn the economy
around, few expect to see any improvement until late 2010, at the
earliest. Several cabinet members have confided to us that they
expect this winter will be more difficult than last year. The full
force of the economic crisis has not reached the general population,
but will do so once the proposed cuts in benefits and services are
implemented alongside significant tax hikes. At the same time, the
government's bleak prognosis, which anticipates no economic growth
until 2013, could also prove to be overly optimistic. For example,
Iceland could fail to meet these targets due to several key
variables, including how the Icesave dispute will be resolved, when
the IMF loan will be disbursed and the success of the lifting of
capital restrictions.

WATSON

© Scoop Media

 
 
 
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