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Policy Statement 2000

Policy Statement
by Mr. Davíð Oddsson, Prime Minister of Iceland,
to the Althingi, October 3, 2000

Mr. Speaker, Fellow Icelanders:
In a famous remark, one of our literary geniuses once said that the Icelanders preferred not to argue about anything except trivialities. These words were noticed and remembered because they were succinct and contained a grain of truth. Most of us at some time or another have been guilty of letting minor details block our view of what is more important. And even at this honourable venue it tends to happen rather too often. However, this does not alter the fact that nowhere else in this country is there more frequent and more serious discussion, in so few square metres of space, about issues, proposals and opinions which are important to individuals, large groups and even the entire nation. And now the "season" is beginning once again – the battle of words, conflicts, disputes and wrangling, but also well thought-out argumentation and nimble clashes which serve to shed light on different ways towards achieving the aim which is surely most important to us all: benefiting our country and nation. Much other work takes place here which is less prominent, such as the committee work which is conducted in the shadows but is yet so vital, and then of course come the decisive moments – when bills become law and proposals become parliamentary resolutions. Perilous as it may be to quote averages, I shall succumb to the temptation and mention that on average Iceland's parliament passes one act of law on every single day that it is session, and indeed it is arguable whether this is not rather too much of an effort. Be that as it may, the government is now presenting parliament with a list of the bills which the members of the cabinet intend to propose, and of course this is not exhaustive. The national budget report has been presented and the Minister of Finance has presented his draft fiscal budget. So parliament cannot be accused of beginning on the "trivialities" that I mentioned earlier. And what do these weighty documents tell us about the future? Where are we heading and how have the government's policies been working out during its first whole year in office?

Next year the treasury will generate a greater surplus than ever before in Icelandic history. The fiscal surplus has been increasing from one year to the next in recent years. Next year's surplus will be close to ISK 30 billion, or the equivalent of 4% of GDP. This is absolutely unprecedented. But the crucial point is that this result follows a pattern. For the third successive year the treasury surplus will exceed ISK 20 billion, or more than ISK 80 billion in all since 1999. At the end of next year net treasury debt will amount to only 14% of GDP, but was heading for 60% a few years ago. On this point, the national budget report says: "This is a unique result which has brought Iceland into the forefront in this respect among comparable nations." If this pattern continues through out the government's term of office, the treasury will be almost free of debt at the end. This would be a great milestone and would ensure not only growing prosperity but, what is more, permanent prosperity in Iceland.

This development is a sign that the economy is stronger than ever before in the history of this nation. The desirability of high economic growth is often disputed, and there is no less disagreement about how material benefits should be shared out. Economic growth has now been averaging almost 5% since the middle of the last decade, and there is no example of a more favourable period in Icelandic economic history. Increased real income and higher wages have accompanied this growth. This major achievement is beyond dispute. At the same time, some 15,000 new jobs have been created in Iceland. Inflation has been low for almost the entire period, despite prophecies that the Icelandic mentality could not tolerate such a prolonged and dynamic period of growth, and that inflation would surely run completely out of control, as has invariably happened before under such conditions. One worthy man claimed in rather outspoken terms that the government was aiming to hide what he called "the difficult situation" until after the last general election. "The ticking time bomb" in the economy was supposed to explode immediately after the election with massive consequences. A year and a half have now passed since the election. Inflation is on the decrease, the economy is cooling down and the króna is in a strong position, even though it has been stretched by the worldwide lack of faith in the Euro. The cooling of the economy will slowly but surely reduce the current account deficit. Unemployment is non-existent, while more flexible rules on foreign labour have made it easier to prevent the labour market from going out of control. This entire development is described in the national budget report, which members of parliament have in front of them, as follows:

"This favourable development is rooted in a solid economic environment and stability which have kindled growth in many sectors of the economy. Market reforms, increased competition and clearer rules and norms have led to a broad-based increase in productivity and value creation. In this environment, new sectors of industry have flourished: high-tech companies in biotechnology and software design have achieved incredible results in the space of only a few years. Thus the new economy has left its mark on economic developments and Iceland appears to be well advanced in this field, as shown by figures for the growth of such companies and for Internet access. Large growth has also taken place in various " traditional" sectors in recent years, including a large scale increase in production of aluminium and the strengthening of tourism. Icelanders have also been establishing themselves abroad on a larger scale than before, not least in the fields of high technology, fisheries and finance.

Thus the contours of the Icelandic economy and industry have changed sharply over a relatively short period. The economy now has an international character in which broadly the same rules and norms apply as among the most advanced nations. This is undoubtedly the best way to secure the economy for the future. The government will therefore continue to build on the foundation which has been laid in recent years, whose cornerstones are an open market economy, stability, clear rules and norms and powerful infrastructure to underpin industrial progress.

The growth period has led to a massive improvement in household living standards. Testifying to this is the fact that real disposable income will be 23% higher this year than in 1995. At the same time private consumption has increased by 36%, or by ISK 110 billion, which corresponds to ISK 1.5 billion per family of four. It may be added that many households and individuals have taken advantage of new opportunities for saving and investment which have resulted from the opening up of the economy, privatisation of state enterprises and the strengthening of the domestic equities market."

A large current account deficit has been the only negative sign in the Icelandic economy of late, and it a cause for concern. Current account deficits are nothing new in Iceland. Previously, they were not least the result of incautious fiscal management. Today's current account deficit is of a completely different character. The treasury is rapidly repaying its debt and is approaching a zero net debt position. Other players in the economy have confidence in its stability and faith in their own capability of repaying the liabilities they have undertaken. If they have done their calculations properly, which there is no particular reason to doubt, and if we manage to maintain an unchanged economic policy, which the government will make every effort to do, the current account deficit therefore poses less of a threat than is often claimed, in addition to which the peak has presumably now been passed. Yet another important fact should be pointed out. In 1995, Icelanders held virtually no assets in foreign equities. By the middle of this year these assets had reached ISK 155 billion and we can take it for granted that they have grown even further since then. The yield flowing in to Iceland from these massive assets will increase sharply in the coming years and thereby contribute to foreign exchange stability, while they will also serve to consolidate long-term saving.

The wage agreements already made by the labour movement and industry organisations should ensure two things. Firstly, that the great increase in real income which has been achieved in recent years will be preserved and in fact grow. General purchasing power has risen by almost 30% since 1993. Such a large increase in purchasing power is almost unparalleled among the countries with which we traditionally compare ourselves. Secondly, the underlying assumptions behind the wage agreements were to secure stability and low inflation. So far, most indications are that both these targets will be achieved. The latter target, of course, serves everyone in the labour market, not least the section which has not yet concluded its negotiations. Thus it should be obvious to everyone that in the remaining negotiations, the main aim on both sides of the table must be not to overturn the assumptions on which economic stability is based in this respect.

Care has been taken to ensure that the increase in real income has also reached those who do not negotiate their own terms, such as the elderly and handicapped, and all the steps taken by the government have underlined its willingness to preserve and boost these groups' purchasing power during its term in office.

The financial position of municipal authorities varies greatly. Most of the larger municipal authorities benefit greatly from the fact that large increases in real estate assessment and greater real rises in wages are yielding them substantial revenues with no changes in their revenue base. Some municipal authorities have actually been increasing their levies on the public at the same time as the central government has been cutting its own. On the other hand, many municipal authorities have suffered from depopulation and other difficulties, and the government obviously wants to come to their assistance by strengthening the Municipal Authorities Equalisation Fund with contributions to meet their depopulation and services. Another aim at the same time is to rectify the arrangement whereby people living in regional areas pay real estate taxes which are in no way consistent with the value of their properties.

More than a decade ago a very incautious and imprudent drive was made to develop "social housing" by some municipal authorities. This was the fault of short-term attitudes taken by the leaders of these authorities and negligence of the part of government involved then. Now the day of reckoning has arrived and no clear solution is in sight. For its part, the government will seek a solution in cooperation with municipal authorities, but on an equitable basis and without absolving the local authorities in question of all responsibility for their actions.

Mr. Speaker:
In April the Minister for Foreign Affairs presented parliament with his report on Iceland's status in European cooperation. The report contains an extensive description of the EEA Agreement and its functioning. Comparisons are made with the scenario of where Iceland would stand without the EEA agreement, and also with the possible consequences for Iceland of European Union membership.

It emerges that the EEA Agreement is working as was intended, it has turned out to have produced beneficial results and has functioned well in practice. Admittedly the EEA agreement does not secure direct access to the political decision-making process within the EU. That was never on the cards. This was known when the agreement was made and has therefore been obvious from the outset, as the report points out. On the other hand, Iceland did not need to accede to any of the aspects of the European Union which it did not desire to. It is pointed out that the benefits of the EEA Agreement involve in particular the granting of access to the elements of European cooperation which are most interesting, while others, which do not appeal to Icelandic interests or are directly contrary to them, remain outside it. And what are these elements? Yes, they involve the major disadvantages which have often been pointed out before and which the Minister for Foreign Affairs' excellent report confirms are still in place.

Thus the risks posed to Icelandic interests by involvement in the EU's Common Fisheries Policy are outlined in the report. There is nothing to suggest that the EU Common Fisheries Policy is likely to alter in any major respect. Compared with Iceland, all conditions within the European Union in this field are completely different, as the report rightly states, since the EU regards fisheries as an aspect of regional development rather than as an independent and sustainable industry. Regarding fisheries, the report particularly underlines what has always been known: that the basic principle in membership talks is that permanent exemptions from the Union's policies cannot be obtained.

Certain segments of Icelandic agriculture could entertain hopes of some grants through membership, grants which in all likelihood would nonetheless be reduced with the expansion of the EU. Processed agricultural products would be disadvantaged in competition with large continental producers, and Icelandic farmers could encounter trouble in disposing of their production, as the report states. It is also pointed out that Iceland would encounter difficulties in securing regional development grants during membership talks, and that such grants to Iceland and other better-off EU members would decrease as the union expands. For an economy like ours, the disadvantages of membership of EMU and adopting the Euro are already known and in particular entail further curtailment of the Icelandic authorities' scope for responding to unexpected economic fluctuations. However, the report points out that membership of the Euro could be a noteworthy option given that it would promote lower rates of interest.

The report by the Minister for Foreign Affairs attempts to estimate what Icelandic membership of the EU would cost in pure money terms. Iceland's probable contribution to EU funds was considered there to be more than ISK 8 billion per year, which was a cautious estimate, and the uncertainty surrounding how much would be recouped was also pointed out. Around half or more of this sum could be expected to be recouped from EU funds initially, as the report puts it, on account of grants and subsidies for agriculture, regional development and fisheries. Regarding fisheries subsidies, however, the report makes a point which should be underlined, namely that it is uncertain whether Iceland would actually seek such funding. This would be contrary to all principles in the operation of Icelandic fisheries, and the report mentions that EU grants to fisheries have proved damaging to the industry there.

It is certain that Iceland would have to make a high per capita contribution to EU funds, one of the highest within the Union, on account of the relatively very high national income in this country. Iceland would be equally sure to pay much more into the Union's coffers than it would receive in return. It is also certain, after the expansion of the EU, that Iceland's contribution would increase greatly and repayments be reduced on account of much higher national income per capita in Iceland than in the new member states.

Denmark's decision to reject the abandonment of its independent currency in favour of a common currency is now clear. This was a very noteworthy outcome. The government parties in Denmark, together with the largest opposition parties, media and leaders of all sides of industry were defeated on this issue. I shall not pass any judgement here as to whether this outcome was good or bad for Denmark. But we can all draw a major lesson from the referendum and its decisive result. All the same, the Icelandic authorities need to keep a close and independent watch on developments in Europe. The report by the Prime Ministerial Committee on the Euro and the aforementioned report by the Minister for Foreign Affairs are part of this process.

Mr. Speaker:
Although it is necessary to reduce the scale of economic activity for a while in order to achieve better balance, we have many good possibilities ahead of us for the future. The most recent measurements of juvenile fish encourage hopes that fish stocks will strengthen in the course of time, and discussions are now under way on substantially stepping up the harnessing of resources for power-intensive industry. In recent years the importance of knowledge and research has been highlighted and increased allocations have been made to these areas. This is now delivering results in the form of the large number of new companies which primarily base their activities on research and development and the utilisation of new technology. The activities of deCODE genetics may be pointed out as one example to which great hopes are attached. Structural reforms to the economy have stimulated activity in new sectors and these will be continued. Thus the next phase in the government's privatisation plans is now being prepared. While there are no grounds for mentioning specific timetabling here, Iceland Telecom, the banks and Iceland Prime Contractor are towards the top of the list. All these are extremely large-scale projects, so it need not come as any surprise that it takes some time to prepare them.

The Resources Committee delivered its report to me a few days ago. The committee returned a joint opinion on this important and complex task, which in itself is quite noteworthy. We surely all hope that this represents the first step towards reasonable consensus at a national level on the main principles for the fisheries management system, although it must be admitted that much work still remains to be done. For my part, I consider that the Resource Committee's report brings us all closer to consensus on this issue.

Mr. Speaker:
A short policy statement inherently only gives scope for naming a handful of issues from the government's agenda. Simply reciting the numerous issues involved is of little value. The government's focuses in these areas will emerge during the debate on the fiscal budget and during the weeks to come when the ministers present their policy issues to parliament. I shall conclude my address here with my wishes for good cooperation with the parliamentary leadership and opposition regarding the progress of these issues, and my wishes to the Icelandic nation for all good fortune now and in the future.

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