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Prime Minister's Office

Policy Statement 1999

Policy Statement
by Mr. Davíð Oddsson, Prime Minister of Iceland,
to the Althingi, October 4, 1999

Honourable Speaker of the House, Fellow Icelanders:

This spring the Althingi convened briefly after the general election and attended to its statutory duties. The session of the Althingi that is now commencing is nonetheless the first proper one for the new electoral term in everything but the formal sense. Now the main lines will be laid down by both the Government and the Opposition. Both will presumably equip themselves with last spring's electoral manifestos and debates and the tasks that they want to tackle. In addition, the Government can rely upon its coalition policy statement which addresses several of the main issues of the day in concise but clear terms. A number of implementations of points from the Government's policy statement appeared in the draft budget which is the first real task facing parliament now.

The Government parties decided that work on most of the tasks covered by the policy statement should be phased equally throughout the term of office, not least those which have an impact on the treasury's payments flow. Such an approach is consistent with the spirit of the stability which the Government seeks to consolidate and all other policy issues will have to take into account.

Certain aspects of the economy have been under some discussion recently. Various people have kept up their old habit of focusing in particular on negative developments. But hardly anyone can have failed to notice that in most respects, the Icelandic economy is in fine shape at the moment. There are exceptions, however, and supporters of the Government do not shy from either discussing them or tackling them. But let us begin by outlining the main issues.

The scenario is as follows: Iceland has never before experienced a period of more favourable economic developments. The economy has never grown and flourished on such a scale for such a length of time. For four whole years, average annual growth has exceeded 5%. In order to comprehend these figures fully we need to put them in an international context, and also a historical one. This percentage figure tells us that for the past four years economic growth has been double that of the countries we traditionally compare ourselves with. Such a favourable four-year comparison cannot be found at any other time, because it is not as if our main trading partners have been going through a recession. What is gratifying is that this growth has been amply passed on into ordinary people's pockets, because real disposable incomes have increased by 20% over this period. Unemployment has virtually vanished, while only five years ago political parties and industrial organizations were unanimous that overcoming this plague was a priority task. This has been done.

There is a time-honoured tradition in politics to argue with varying degrees of relevance about the reasons for this success. But the situation is different for those people who, unlike us, do not earn their living from such wrangling. Experts in economics and economic management, in Iceland and overseas, are not in the slightest doubt. They are unanimous that the crucial factor was the market reforms and economic restraint that Iceland has witnessed in recent years. Competition has been boosted, economic rules and norms have been made clearer and simpler, and the stranglehold which the state once exerted has been eased. Heavy investments have been made, for example in power-intensive industries, and the secure economic climate has helped to boost business pioneers' confidence about launching a wide range of innovations, which despite an element of risk have produced great results.

It was obvious to us that the stagnant economy needed to be shaken up and that expectations and willingness to invest had to be encouraged in order to start the wheels turning again. The position now is that growth can still be expected to continue and most conditions look favourable. After such a long growth period it is inevitable to slow the pace down a little. Various indicators support this view. We have seen price figures creeping up somewhat in recent months. Many of those price rises have little to do with overheating of the economy. We are all aware of the hefty rises in petrol and oil prices. Their roots do not lie in our economy and we will have little influence over them. We have seen that lack of competition, along with takeovers, in the food sector have pushed up prices beyond any reasonable explanation. We have seen that a lack of building land has fuelled a rise in property prices. In the opinion of the Financial Supervision Agency in its recent report, Iceland's insurance companies have gone unjustifiably far in raising their premiums. Other individual instances of this kind can be mentioned. It is only natural to keep a watchful eye on such things.

On the other hand, this is no justification for allowing the Government to stand on the sidelines. And such justification is not being sought. There is more underlying inflation than we consider satisfactory in the long run. Inflation resembles the high temperature and aches and pains felt by someone with an illness. We all know real-life examples of people who do not have time to fight their ailments by slowing down and getting more rest. They invariably take medication to remove the symptoms. That is the way inflation used to be treated in the past too. Various types of laws were passed to freeze prices, and occasions for price rises were swept under the carpet. Such actions could produce a momentary gain but proved to be a curse in the longer term. They were a pain-killer, not a cure.

We know that the root of the real expansionary tendencies in the economy is that the pace of activity is too fast to be healthy in the long run. The stage has been reached where various factors of production in the economy are fully utilized and the growth in productivity simply cannot keep pace, impressive as it may be. The answer is thus to slow things down a little, although without slamming on the brakes. Interest rates have been raised in order to cut back credit supply and credit expectations. The budget removes money from economic activity and various construction projects have been postponed. At the same time, saving and thrift are made more beneficial in a particularly systematic fashion. Likewise, it can be pointed out that one of the purposes behind the sale of state enterprises is to curb money supply.

Recent rises in price levels will slightly reduce the great benefits that employers and unions achieved in cooperation with the Government when the last national pay agreements were made. All of these parties are fully aware what preconditions need to be at hand so that wage-earners and businesses can continue the most favourable period for purchasing power this century and extend it into the next century as well. As stated in the national budget that I have presented to the honourable parliament, our collective aim must be to achieve a soft landing in the economy. We all know from bitter experience how badly we suffered from crash-landings in the past.

The policy we are following and the methods we will use should ensure a continuation to this great period of economic growth. We should make no mistake that this is a difficult task, and no one must refuse to take on the challenge. But if we make a concerted effort and are guided by a sense of responsibility, the economy will gradually stop overheating and inflation will decelerate once more. We have taken our place at the top of the league and there we want to belong, not in the economic third and fourth division where we used to be.

Honourable Speaker.

Labour unions recently published their studies of several aspects of taxation. Although the main focuses there are rather dubious, this is a highly praiseworthy initiative. Indeed, in its policy agreement the Government has declared its willingness to collaborate with employers and unions on a review of the tax system with the aim of reducing tax fraud, lowering marginal taxation effects, and simplifying the tax system and making it fairer. Likewise it needs to be ensured that the tax environment for Icelandic businesses will be on a par with the best in the countries that we compete with.

The environment for financial institutions is another area that can have a crucial impact on the competitiveness and soundness of Icelandic business.
Work is now in progress on selling the state's shareholding in FBA, the Icelandic Investment Bank. The framework that the Government decided to use for this share offering has been applauded. It is transparent and clear, and successful resolves the problem that had arisen. Iceland's financial market is undergoing major development, although it is no wonder that this young and open market is encountering a number of teething troubles that need to be overcome. When the commercial banks are privatized, it must be ensured that Icelandic banks are powerful and can stand up to foreign rivals, while at the same time making sure that their ownership is widely spread. The Minister of Commerce is currently drawing up a bill to strengthen monitoring of financial activities, since the rapid evolution of the financial market and various events in recent weeks have made such a reform necessary. At the same time, the Competition Act is under review.

Honourable Speaker.

As usual, major tasks await this session of parliament. The budget will take a considerable amount of time to deal with. It reflects the Government's firm resolve to play a strong hand for the Treasury, while at the same time devoting large resources to ongoing innovation, development and providing quality services. Treasury debt will be repaid for yet another year. This is good news, not least for young people and the children who are embarking on a long future in this country. It is also in their interests that Iceland should rank with the leading countries in education and measure its standards only against the best available. The new educational policy which was formulated during the last term of office needs to be followed firmly through and should serve as the foundation for reforms to Icelandic education.

In recent years, hundreds of millions of krónur have been allocated to purchasing and operating school computer systems, which are becoming continually more complex and expensive. New plans in this field were announced recently. These assume that at the start of their studies all students in secondary education will be offered discount terms for acquiring their own portable computers for which suitable connections and equipment will be installed in schools.

The Government's policy statement assumes that part of the benefits accruing from the privatization of state assets will be used to boost and improve information technology. This is a growing task which we need to tackle firmly if we intend to maintain our lead. A clear and unequivocal demand has been made for Icelandic to be used in this country's computing environment. The agreement signed with Microsoft last winter entails a recognition of this demand. The next major task will be to apply new language engineering technologies in order to consolidate the position of the Icelandic language in the fields of computing and information technology.

Honourable Speaker.

Iceland is more dependent than most other nations on treating its natural resources on land and at sea in an ecologically responsible way. Those who accuse Iceland of environmental abuse have a keen gift for turning the facts inside-out. Unfortunately, such misrepresentation has been attempted by certain parties in Iceland in connection with Kyoto. In the talks which the Government has held with a large number of nations aimed at identifying ways for Iceland to sign the Kyoto protocol, however, no accusations have been heard anywhere that it has a poor environmental conservation record to defend. Far from it.

Environmental conservation in Iceland is based on a clear policy which rests jointly on the strong awareness of the entire nation of their closeness to nature and on the consensus that has prevailed about treating the country's sensitive ecosystem with care. The guiding ecological ideology, however, has never been the same one which has been put forward in certain parts of the Western world in recent years and decades. We have felt the serious effects of blind faith over the issue of whaling, where we have been subject to irrational pressure which has nothing to do with true environmental conservation.

Icelanders have not acceded to such views because they depend for their livelihood on nature and its genuine conservation, whereby care is taken to utilize natural resources on sustainable principles. A policy which takes the aggressive form that I referred to is not suitable for people who live from nature to the extent that the Icelanders do.

It is absolutely contrary to Iceland's interests to fall for such extremism. If we did so, we would be ruling out the chance to enjoy the benefits of our own country, regardless of whether this involves renewable energy resources or any others that we must utilize if Iceland is to remain a viable place for people to live. When the parliamentary committee on the environment argued for having a clause to prevent retroactive legislation on environmental impact assessments, no one who sat in this chamber could have failed to realize that it referred in particular to the Fljótsdalur hydro project. People who were behind this move should not disclaim their own actions for the sole purpose of scoring political points.

Honourable Speaker.

The Minister for Foreign Affairs has briefed the Cabinet about preparations for the next round of WTO talks. Important interests will be at stake in these talks, which will also strive to adapt international rules and norms so that they take account of greater globalization and demands for sound business practices. We can only approach this task with open minds, considering the extent to which it involves our main economic sectors. Iceland, for example, has been a leading advocate of abolishing fisheries subsidies, which impair competitiveness and undermine systematic fisheries management. Of course our special status will be put to the test in other areas, such as agriculture, but we should recall the great sense of responsibility shown by our leaders in that sector in previous talks of this kind.

National agreements on agricultural production are now under review. The Government's policy statement gives clear indications about its viewpoint, which is to secure and consolidate Icelandic agriculture. Solutions need to be brought together which at once take full account of consumers' interests and secure the revenue base of farmers.

Farmers and other people living in rural and regional parts of Iceland have benefited especially from the revolution that has taken place in Iceland's road network and communications in recent decades. Work is now under way on designing a coordinated communications strategy addressing roads, harbours and airport development, with the aim of utilizing investments as efficiently as possible. Such progress is one basis for our growing opportunities in tourism at present. We are managing to extend the tourist season substantially all over the country. This trend both benefits regional development and serves to generate foreign currency earnings at a national level.

Honourable Speaker.

A brief policy address can cover only a few of the tasks in progress at Government ministries. These tasks will duly be considered by parliament and the Government hopes for good, constructive cooperation in dealing with them. The precondition for them all, however, is the successful implementation of economic policy. I would like to conclude my speech by highlighting the main aspects of it as described in the Government's policy statement, in particular the points concerning the economy and business. The main features are:
* To maintain fiscal equilibrium and systematically reduce Treasury debt.
* To continue restructuring of central government activities.
* To launch systematic action in order to encourage general saving.
* To review tax legislation with aims including the reduction of marginal taxation effects and discrimination within the tax system.
* To continue privatization, especially of state enterprises that compete with privately owned companies.
* To increase the diversity of business activity and export sectors.
* To encourage small and medium-size enterprises and support business pioneers.
* To consolidate the mainstays of regional communities in accordance with the recently approved parliamentary resolution to that effect.
* To continue work towards achieving the widest possible consensus on the fisheries management system, spearheaded by a committee recently appointed by the Minister of Fisheries.
* To launch extensive consultation between the Government and farmers and their organizations concerning the future structure of Icelandic agriculture, in order to ensure efficient operation in this sector and create the best possible livelihoods for people engaged in agriculture.
* To restructure the energy sector by introducing competition, in order to increase efficiency and bring down energy prices.
* To enhance the profile of the tourist industry, by means including a powerful promotion drive in main markets.
* To boost information technology in order to create jobs nationwide with particular appear for young people.
* To work towards a forward-looking employment development policy, based on a fertile research and innovation environment.
* To go on strengthening education, in particular vocational training at secondary level.
* To review the national insurance system and its interaction with the taxation and pension fund systems.

Honourable Speaker, Ladies and Gentlemen.

Iceland's parliament is at once a political battlefield and a workshop for producing legislation. Let us try this winter to have our battles brisk and sporting, and our laws carefully produced and solid. Thank you.

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