Hoppa yfir valmynd
Prime Minister's Office

Policy Statement 2001

OCTOBER 2, 2001

Mr. Speaker of the House:

The world is in a state of some turmoil at the moment, and no one need be surprised at that. An exceptionally hateful attack has been made on the civilian population in the USA. The evil perpetrators of that attack have not claimed responsibility for their crime. All right-minded people around the world agree that these attacks and the threat they pose must be answered, preferably in a way which will uproot the forces of destruction completely.

Iceland has not hesitated to align itself with the nations that want to make a very firm response. Naturally we will be far from playing any leadership role, but we must surely be ready to contribute what we can. Of course no one is talking about wreaking blind vengeance upon whole nations or people who have done nothing more than adhere to a different religion from ours. No one is talking about bringing the actions of western nations down to the wretched level of the terrorists themselves. Neither NATO as a whole nor its individual member states have approved such action, nor has anyone sought such approval. Those who imply that this is the case are either misled themselves or are trying to mislead others.

The day after the attacks on the USA, NATO declared that they were tantamount to an attack on all members of the Alliance. Iceland was naturally responsible for this declaration, like the other member countries. NATO's security policy, agreed at its summit two years ago, assumes that member countries may need to make a collective response against acts of terrorism. The anti-terrorist action now being prepared at international level is not an act of vengeance, but a punitive measure and police action. We are duty bound to take part in punishing those who are responsible for a horrendous crime and we must use all means at our disposal to prevent further atrocities. It is impossible to take any other standpoint if the world is to be a peaceful place to live in. Otherwise no one will be left safe, apart from the criminals and their henchmen.

Human destruction is, of course, the crucial issue. But this atrocity also has serious economic consequences, especially if its perpetrators have succeeded in sowing lasting fear among democratic nations. Then there is a risk of a contraction in business activity and more ponderous and time-consuming procedures in various areas of the economy. One ramification of the difficulties following the attacks was very quick to reach Iceland: the question of insurance for the country's powerful aircraft fleet, which was suddenly thrown into total chaos. A swift response was needed, with exceptional and potentially controversial measures. On behalf of the Government I would like to thank the leaders of the opposition for the positive attitude they showed towards this issue.

As the Minister of Justice has pointed out, the legal framework governing terrorist crimes now needs to be reviewed in light of recent events. Two international agreements under the auspices of the United Nations need to be ratified. One of them imposes controls to prevent financing of terrorist activities and the other is a treaty against organized crime.

Alongside other changes to the legal punishments for terrorism, a legal amendment is planned to prohibit the use of disguises at protest meetings. This move takes into account the disturbances and riots that have been arranged in connection with international meetings where masked professional thugs have organized attacks and acts of vandalism. Finally, in cooperation with neighbouring nations, Iceland will address changes in laws and regulations concerning extradition for serious crimes such as terrorism.

Before the tragic events that I referred to earlier, markets in many parts of the world had been weakening due to economic uncertainties, not least in the USA and Japan, and signs of contraction in some of the largest EU countries did not improve the situation. The terrorist attacks delivered yet another harsh blow against the markets, since fear and uncertainty are the worst affliction that the free market can suffer. Iceland's equity market weakened substantially in recent times, following the pattern in other countries, although specific local factors were also involved. However, strong and clear signs had emerged that the bottom had been reached and companies would soon rally.

Inflation had increased in many places, although by more in Iceland than in the countries with which it compares itself. This change was fairly closely matched to changes in the exchange rate. Now inflation is slowing down again and the outlook is fairly good, even though the twelve-month rate will remain high for the time being. But the outlook for the future is more important than the past. Inflation is now forecast at 3.4% from the beginning to the end of next year. The Central Bank has said it will lower its policy interest rate when it sees sure signs that its own forecasts hold good, and will also take into account of whether the labour market is stable. If these forecasts and expectations hold good, a reduction in interest rates ought to be in sight.

The Government is now finalizing a new phase in the tax reform programme that it has been implementing in recent years. It is common to hear people confuse tax rates and tax revenues, accidentally or deliberately depending upon who is involved. At the time when it cut corporate income tax from 50% to 30%, the Government maintained that in the final analysis this reduction would actually yield more revenue for the treasury, since the tax cut would give companies greater scope for their activities and thereby for earning revenues. The same argument was cited concerning taxes on various types of capital income.

As far as businesses were concerned the Government assessed the position correctly, as concrete figures show, and the 10% tax on income capital also turned out to generate more revenue for the treasury than the old 40-45% tax did, because such a high rate smothered all business, leaving nothing to levy the tax on. It is astonishing that some left-wingers seem incapable of comprehending that a 45% tax on virtually no business is a worse option for the treasury than a 10% on large, brisk business. The new economic framework enabled us to increase real wages in the space of a few years at a faster rate than other countries could achieve. Lower personal income tax rates thus generated more tax revenue than the higher rate had done before.

False prophets are claiming that taxes have been raised, whereas the truth is that tax rates have been cut but tax revenues have risen, just as the Government predicted. It goes without saying that the parliamentary opposition invariably took a firm stand against the Government's tax cut proposals, and it will not come as any surprise if this turns out to be the case again when the coalition parties present more proposals in the near future.

Mr. Speaker of the House:

Personal income tax in Iceland is among the lowest in Europe. This is the result of both a high personal tax-free allowance and a relatively low general tax rate compared with other countries. But it should be borne in mind that Iceland's tax system, like those of most other countries, is structured in such a way that the tax burden keeps pace with the economic cycle. It automatically rises when the economy is robust, and falls when the situation tightens. To a certain extent this serves to level out swings in the economy, i.e. it holds back an upswing and cushions against the downswing. Such levelling out of cyclical swings is considered necessary in any modern economy and contributes to greater stability. This means that countless tax surcharges on high incomes are automatically triggered by the present tax system. A specific level at which a higher income tax rate is levied must therefore surely be questionable.

Mr. Speaker of the House:

The Minister of Fisheries has recently announced the findings of the Fisheries Management Committee and, in spite of everything, closer consensus has been reached on them than is generally the case, although there are still ample points of disagreement. The committee reached a majority finding, while one coalition party member has expressed reservations and the parliamentary opposition is split several ways on the issue. However, everything suggests that, in principle, the majority view provides a constructive foundation. Close attention has clearly been paid to the in-depth report produced by the Resources Committee, without following it to the letter. Now the matter will be handled at government and parliamentary party level, then finally here at the Althingi itself, where it is desirable that as many people as possible will rise to the challenge of examining the total interests at stake rather than becoming entangled in minor details on which there is little hope of ever achieving a majority decision, as we have repeatedly seen in the past. Attempts to score political points have caused great damage to Iceland's fisheries sector in recent years and decades, and it is time they came to an end.

The fisheries sector is in an interesting position at the moment. Looking at their interim figures, we might be tempted think that companies were on the brink of destitution. This is because of rules which require the impact of exchange rate changes on capital costs to be entered in company accounts in their entirety, although it may take a long period for this to be reflected in actual business operations. High prices for products, which are rising even further due to exchange rate developments, are not entered in the accounts at the same time, however. These changes go way beyond compensating for the reduction which will take place in catches on account of unavoidable quota decisions. There is no doubt that when the positive signs start going onto the books, they will have a positive effect not only on fisheries companies but also on virtually the entire equities market. Fisheries still play the most crucial role in the Icelandic economy, although other areas are establishing themselves.

It was our duty to support the growth of new sectors. In recent years we have witnessed how our neighbours in Ireland have adapted rules and conventional ideas in order to open the way for new and interesting companies into their economy. As I mentioned earlier, the Government is discussing one element of this, and no small one either: the tax environment itself. We ought not to rest there, because special circumstances may warrant looking even further afield, if golden opportunities present themselves here, as they have done in Ireland. There are grounds for taking a bolder approach in this respect than we have done so far.

The outlook for the power industry in Iceland is excellent at the moment and it is important for us to take advantage of the possibilities there. The Kárahnjúkar hydro development project is a very attractive option whichever way it is viewed, and it would be a great loss if that huge opportunity were to pass us by. It is not yet known whether the contraction in air traffic will have any long-term impact on world aluminium production, although the industry has withstood fluctuations well during previous periods of uncertainty. Thus there should not be any reason to assume that recent events will permanently dampen the great interest that has been shown recently concerning increasing investment in these sectors in Iceland.

Mr. Speaker of the House:

Systematic steps have been taken to reduce overheating of the economy in recent times. It was always said that this task would take a considerable time, since slamming on the economic brakes would do more harm than good. Now it is clear that economic growth will slow down somewhat this year. The current account deficit is rapidly shrinking, thereby reducing pressure on the exchange rate. Present forecasts suggest that a minor contraction in growth could take place next year alongside a continuing reduction in the current account deficit and rapid deceleration in the rate of inflation. The time is therefore ripe to prepare the ground for a new growth period. Proposed tax cuts will play an important role here, along with the fact that conditions should soon be in place for cutting interest rates. A substantial improvement in profitability is also forecast among exporters and companies competing with imports in the next few months. Furthermore, intensive work is now in progress to prepare new and lucrative investments, in particular in power-intensive industries where the impact of decisions regarding development projects could be felt as early as next year. Most pointers therefore suggest some economic growth could take place next year when these measures begin to have an effect, provided that international economic developments do not upset the picture.

Forecasts suggest an annual GDP growth rate of 2.5% from 2003 to 2006 and an ongoing reduction in the current account deficit. If the power-intensive development projects currently under preparation are launched, the rate of growth will be considerably higher. Thus all the prerequisites are in place for a flourishing economy over the years to come.

In recent years, total allocations to research and development in Iceland have been growing by leaps and bounds. Primarily the increase in research has been the result of greater corporate participation, although it has also been stepped up in the public sector alongside development work under the auspices of the University of Iceland. This trend has been matched by rapid growth in products and results from research activities. Evidence can be seen in the large number of new technology companies, renewal and growth of established businesses and the increase in jobs in the technology sectors. This is most marked in software design, production of medical instruments and prosthetics, development of pharmaceuticals, biotechnology, genetics and other sectors.

Part of this success lies in the stimulus provided by strengthening of research funds in Iceland, and in the procedures adopted for competitive assessment of applications and monitoring of the use to which grants are put according to project-specific agreements. All available criteria suggest that this investment has produced a good return. Reforms to the economic environment and deregulation of financial markets in the 1990s have also created important conditions for utilizing expert knowledge in this way.

A review of legislation in these fields has been under way recently. They will be given greater prominence with the assignment of strategic planning to a council working under the Prime Minister, where Government ministers will join scientists and industry representatives to formulate policies for research and development issues. This is a new arrangement in Iceland.

It is now clear that the largest phases in the Government's privatisation programme will be achieved during the present term of office. Sales of shares in Iceland Telecom began last month. A certain amount of fuss has been made about this sale and the unexpectedly muted response from the public and institutional investors, given how good a company was involved. Some people even went to far as to dub the outcome of the public offering a major setback! In fact it is well known how much words have been devalued in discussions of current affairs. News desks call every minor public sector strike a "state of emergency," the same phrase used to describe the situation after the attacks on Manhattan. Admittedly, sales of shares in Iceland Telecom could have been brisker, but no damage was done, no setback occurred. People in Iceland will still have the opportunity to acquire shares in Iceland Telecom and strategic investors will have good opportunities, at a later date, to realize what is at stake and see the light. The crucial point, however, is that Iceland Telecom's position remains unchanged. Preparations for privatisation of the state's remaining shares in Landsbanki are continuing and that offering will hopefully go smoothly.

Mr. Speaker of the House:

As usual, the healthcare sector absorbs the single largest share of treasury revenues, and no one grudges that, although caution and resourcefulness are needed in deploying such enormous sums. The Minister of Health has underlined that the Government's main aim on healthcare questions is to ensure people in Iceland a health service to which everyone enjoys equal rights, irrespective of personal circumstances or domicile. This applies in particular to access to healthcare centre services, which are the basic level at which the health service operates. Reorganization of healthcare centres is pending both in Reykjavík and regional areas. Particular attention will be paid to staffing requirements and responses to the shortages that are now faced.

Another major healthcare issue is to lay the foundation for action on mental health, in accordance with the focuses laid down in the "Health Strategy until 2010" which parliament approved in the spring. Mental disturbance has been recognized as among the most common illnesses in modern times. It is a problem that very many Icelandic households need to tackle, although this is not always made known. Such illnesses are thought to be the cause of more lost working days and more cost for the community than most others, which underlines the importance of a making a very serious response to them.

Mr. Speaker of the House:

I began by discussing international affairs, and with ample reason too. Iceland wants to take part in the development of international affairs. We do not hesitate to engage in both cooperation and competition with other nations. The Minister for Foreign Affairs has announced a Summit of NATO Foreign Ministers in Iceland next spring. Significant decisions are likely to be prepared there, not least concerning the enlargement of NATO. Iceland's position on that issue is clear and there are no grounds for assuming that the attack on the USA need change the attitudes of western nations towards enlargement of the Alliance.

Relations with the European Union are extremely important to Iceland. For this reason and in accordance with its policy statement, the Government will continue to monitor developments in the EU closely.

Nothing has emerged which give grounds for considering EU membership at present. The fact that no political party has incorporated EU membership into its agenda speaks volumes about what the issue means for Iceland. The explanation is that the European Economic Area Agreement functions as intended and secures all Iceland's main trade interests within the EU. However, this does not alter the fact that we need to consider how to adapt technicalities in the Agreement to the EU integration process in other areas than those involving trade. Furthermore, the community's enlargement into Eastern Europe must not harm the trade interests that Iceland certainly has in the countries applying for membership; this matter must be resolved according to the fundamental principles of the WTO.

What remains is that Iceland's trade interests in Europe do not put it under pressure to apply for membership of the EU. At the same time, Iceland would face many well-known disadvantages if it were to join the Community. Consequently, other arguments need to be put forward for joining the EU than those involving tangible interests and the basic conditions on which Iceland's living standards are based.

Globalisation presents Iceland with new opportunities which make it inadvisable for the nation to commit itself too closely to the EU. Membership entails participation in a customs union, in which respect the EU is a closed entity. At the same time it is common knowledge that open and diverse trade with other nations is the foundation for Iceland's economic well-being.

Mr. Speaker of the House. Fellow Icelanders.

Parliament is about to begin work and a lively session can be expected, although it will never lose sight of the seriousness of its task. The Government hopes for good cooperation with the opposition on promoting various issues, while it does not ask to be spared from criticism, argument and fierce disputes, as the occasion demands. Everyone in Iceland knows that, however fiercely parliamentarians may clash, the common will of the whole of parliament is to benefit the nation and country to the full extent that it can.

Was the content helpful?
Thank you

The tip will be used to improve the quality of services and information on the website of the Cabinet. Feel free to contact if you need assistance.

Why not?

Contact us

Tip / Query
Please answer in numerics