VZCZCXYZ0565
PP RUEHWEB

DE RUEHRK #0176/01 2781649
ZNR UUUUU ZZH
P 051649Z OCT 09
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 4181
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS REYKJAVIK 000176 
 
SENSITIVE 
 
NSC FOR HOVENIER 
TREASURY FOR NORTON 
 
SIPDIS 
E.O. 12958: N/A 
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