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Prime Minister's Office

Prime Minister's Policy Address 2006

Honourable President, fellow countrymen.

The end of this electoral term is drawing to a close. A number of our honourable members of the Althingi have already announced that they do not intend to stand for another term in the elections scheduled for May 12th this spring.

A number of changes have taken place in the Government in recent months, following the decision of Mr. Halldór Ásgrímsson to retire from politics after a long and successful career. Most of the new ministers are already well acquainted with the work of the Althingi, but I especially welcome the new chairman of the Progressive Party, Mr. Jón Sigurðsson, the Minister of Industry and Commerce, who has not participated before in the work of the Althingi.

One of the most important tasks of the Government in recent months has been to reach agreement with the US Government regarding our defence and issues related to the departure of the US Defence Force. It is safe to say that the decision of the US authorities to close the base came as a surprise. It was nevertheless clear that they were willing to adhere to their commitments pursuant to the Defence Agreement of 1951 but without the permanent presence of American forces in this country. The Government took the position at the outset that, in spite of these developments, the best option was to build further cooperation of the two countries on the Defence Agreement, since no other realistic options were available.

The agreement introduced last week is favourable for Iceland and marks a watershed in Icelandic-US relations.

The negotiating task was threefold. First, it was necessary to ensure the continued operation of Keflavík International Airport in spite of the departure of the Americans who owned important equipment there that is vital for the operation of the airport. According to US law, such equipment would have to be removed unless agreed otherwise.

Second, the return of land and facilities in the agreed areas was discussed, leading to the conclusion that Iceland will take possession of and get to use significant infrastructure facilities at Keflavík Airport. There are no imminent pollution problems, but once clean-up of polluted areas commences, it will be the responsibility of Iceland in accordance with Icelandic standards and over such a period of time as is suitable for ourselves to engage in such a work. There are great opportunities ahead to utilize these significant facilities to our advantage without causing regional imbalances. To this end, the Government has decided to establish a state-owned limited liability company, with the participation of the local governments, that will be entrusted with the task of transforming the base area and develop for future use. There is no doubt that this area will be sought after for various purposes.

Last but not least, the negotiations with the US authorities concentrated on the task of ensuring Iceland’s future defence interests. I believe this has been achieved. The US authorities have declared that they will safeguard Iceland with its military forces if the country is threatened. This is an important commitment and assurance of the US authorities which reconfirms the validity of the Defence Agreement of 1951. The two governments will be in close consultation regarding the further implementation of this new cooperation.

The assistance and cooperation offered by the US authorities in the areas of law enforcement, border security, coast guard, defence against terrorism and other security matters is also of great importance. A number of opportunities arise for Icelandic law enforcement authorities in this respect. It is evident that Iceland must play a more active role in safeguarding its own security, especially when it comes to the inner security of the country and the nation and devote more funds to tasks in this area. The recent statement of the Government discusses these tasks ahead in detail.

Madame President
Iceland is an active participant in the process of shaping a new world order. The candidacy of Iceland for a seat in the Security Council is probably the clearest sign thereof. An election to fill a vacant seat in the Council will take place in 2008 and work is underway to secure support for this candidacy. Furthermore, Icelandic peacekeeping forces contribute to the efforts of the international community, particularly in Afghanistan and Sri Lanka. Maintaining a peacekeeping force is risky by nature, and a consensus is necessary for carrying out its task. The announced changes in emphasis in the work of the Icelandic peacekeeping unit will hopefully lead to a broader consensus on this important contribution of ours to the world community.

We were disappointed that the latest round of negotiations under the auspices of the World Trade Organisation was postponed. We saw it as important to liberalise world trade further, especially in the interest of the developing countries. There are a number of indications that free trade agreements will now become more important, and Iceland is in a good position to face such developments. EFTA already has a wide-ranging network of free trade agreements and is in the process of discussing such agreements with several important countries. Iceland has also entered into exploratory discussions with China on the possibility of a free trade agreement. Iceland would thereby be the first European country to conclude such an agreement with this most populous nation in the world.

An agreement was recently signed between Iceland, Norway and Denmark, on behalf of the Faroe Islands, on the division of the coastal shelf between the countries outside the 200-mile zone in the southern part of the so-called ‘Herring Loophole’. This agreement is of great importance and will strengthen Iceland’s position as a coastal state, but as is well known, the Icelandic authorities are also making claims to the coastal shelf of the Reykjanes Ridge and in the Hatton-Rockall area.

Madame President
This electoral term of office has seen many significant economic achievements. Investment has been robust and economic activity has been vigorous which has benefited the public with a steady increase in purchasing power throughout the period. The purchasing power of the public is currently 60 per cent greater than in 1995, a record in our economic history. Unemployment is only just over 1 per cent in spite of substantial imports of labour, an exceptional development amongst the nations of the world.

But the economy has at times been under pressure during this period, especially because of the substantial changes in the housing loan market where more credit was offered at more favourable terms than previously known. This led to higher housing prices and increased inflation as we measure it in this country. It has therefore become one of the most important tasks of the Government and the Central Bank to ensure that the inflation rate is brought down again. Latest forecasts indicate that we will see a return to the inflation target of the Central Bank, at 2.5 per cent, before or by the middle of next year.

It is also clear that investment in power projects and aluminium plants in the East will slow down rapidly over the next several months at the same time as private consumption is expected to decline. Aggregate demand in the economy will thereby slow down. Economic growth will thus be lower next year, but still about 1 per cent according to available forecasts. We then expect to see a pick up of growth and incomes after 2007.

In recent years, the Government has implemented sizeable tax cuts for households and businesses, liberalised capital transactions between Iceland and other countries and privatised government enterprises. All of these measures have unleashed immeasurable economic forces, both domestically and reaching out to other countries.

It is beyond dispute that the tax cuts have greatly benefited Icelandic households in recent years. Furthermore, the Government’s policy of encouraging power-intensive investment and use of our renewable energy resources has been very successful and strengthened the foundations of the economy.

These successes are also evident in international comparisons, where Iceland is usually in one of the top slots, whether one measures competitiveness, freedom, business transparency, the business environment or the sound and corruption-free economic environment, to name but a few examples. Nonetheless, it is always necessary to watch and safeguard Iceland’s image abroad, which is a joint responsibility of the business community and the Government.

The Government responded to the turbulence in the economy earlier this year with a number of restrictive measures, such as the further postponement of government investment in excess of what already had been agreed. The agreement between the Confederations of Labour and Employers this past summer on the extension of wage agreements through next year was also an important contribution towards removing uncertainty. The Government will cooperate closely with parties in the labour market in order to strengthen the economic conditions underlying this agreement. The Government decided to undertake a number of measures to ensure continued stability in the labour market. The standard personal income tax credit will be considerably increased, and child benefits will be paid to the parents of children that are 16 and 17 years of age. Spending on adult education and job retraining will also be increased.

These measures are now yielding visible results, and there are a number of indications that the economy is slowing down. It is therefore deemed prudent to rescind the Government’s earlier decision to halt new investment project tenders for an indefinite period. It will therefore become possible to go on with investments in roads and similar projects that have recently been under preparation as well as other investments. The Government will also propose to the Althingi that a special effort be immediately initiated to improve the traffic arteries in Reykjavík, where several serious accidents have occurred in recent years. Such an effort should yield important results in accident prevention.

I am especially pleased at the good state of Treasury finances as they appear in the budget proposal. This is very important from an economic policy point of view which makes it possible to reduce Treasury debt still further, even if the debt is already very low. The net Treasury debt is approaching zero, and in addition the Treasury has substantial deposits with the Central Bank. There are not many nations that can claim stronger Treasury finances.

The strong position of the Treasury creates a number of opportunities. The savings on interest payments can now be used for more important projects. The Government is in the process of finalising a number of proposals to reduce food prices, bringing Icelandic prices in line with those in the Nordic countries. These proposals will be announced as soon as they have been completed.

Madame President
Iceland is and should always be a leading nation building on human resources and an international culture. In a recent report of the OECD on the competitive position of nations, emphasis is placed upon the need for education and progress in the areas of research and innovation. It is underlined that education, research and innovation are the driving forces of economic growth.

The Government has emphasised these very same issues. In the policy agreed to by the Science and Technology Policy Council this past spring, the need for strengthening excellence in education and science in close cooperation with business and industry was deemed important. The number of Icelandic students at universities has never been higher, appropriations to universities have never been higher and the curriculum offered has never been wider. The universities have set ambitious targets with the University of Iceland in the forefront.

A comprehensive review of the curriculum of nursery schools, elementary and secondary schools is currently being conducted. A bill is being drafted on school books and related material that is intended to strengthen and broaden the curriculum choice. The education of teachers is under review, and the aim is to adopt a new teacher education arrangement by 2007 when 100 years have passed since compulsory education was passed into law.

A new media bill and a bill on the State Broadcasting Service will be presented at the beginning of this session along with a draft of an agreement on public radio services that lays down a policy for the State Broadcasting Service and defines its role in a competitive market. The great changes that have taken place in the mass media market, both in this country and abroad, have made it important to define a policy for state-owned media for the future.

As technology advances, the importance of good and reliable communications becomes ever more important, especially in matters of safety and rescue. The Government has made a determined effort in recent years to strengthen the foundations of the communications system. The sale of Iceland Telecom and the establishment of the Telecommunications Fund have made it possible to continue constructing such communications systems. The first tender of the fund is now under way and relates to the extension of the cell phone network all over the country. This will be followed by the erection of a high-speed network and the distribution of digital television signals by satellite.

With the departure of the US defence force, the responsibility for rescue operations will be fully in Icelandic hands. The Coast Guard will assume new tasks that call for a large improvement in its equipment. Three helicopters have been leased for search and rescue operations, two of which will arrive soon and the third next spring. Tenders are being prepared for a new ship and an aircraft for the Coast Guard. A review of civil defence legislation will take account of changed security circumstances after the departure of the defence force. The new act on law enforcement districts will merge the police forces in the capital area and police forces on the Suðurnes Peninsula will be merged as well. The work on the renewal and construction of prisons will be continued.

The participation of foreign nationals in the labour market has increased rapidly in this country. Most are here only for a short period and will return to their home country, once their projects are completed. But many stay longer and have the same rights as Icelanders in the European Economic Area. We should extend a warm welcome to these people and make it possible for them to adjust to the Icelandic community. The recently established Immigrant Council is working on a comprehensive policy plan for the authorities with emphasis on organised elementary education and instruction in the Icelandic language for adults along with good information on the rights and duties of these people in our national society.

There is more peace today surrounding issues of fisheries management than often before. The present economic circumstances are favourable for the fisheries industry and provide an opportunity for companies to become stronger and improve the lot of those working in the industry. Our right to the sustainable use of our natural resources within the fisheries zone is beyond doubt, and the initiative of the Icelandic authorities in the fight against illegal fishing near Iceland has attracted attention world-wide and has met with visible success.

As before, the Government will place emphasis on environmental protection. The establishment of a national park at Vatnajökull glacier is the largest environmental protection project in the country so far. The park will be the largest in Europe and will not only lay the foundation for the unique natural properties of this area but also create new opportunities for tourism services near the park, thereby strengthening its entire adjacent region.

The knowledge and safeguarding of the country’s nature is a precondition for a sustainable and sensible use of our important natural resources. Iceland is in a special position because of its wealth of renewable energy resources and has received recognition from international organisations for its initiative in improving air quality, for the use of renewable energy, the capture of carbon dioxide through forestation and the revegetation of barren land, as well as for its initiative in hydrogen development.

Madame President.
I am pleased that agreement was reached regarding the interests of the elderly with the joint declaration of the Government and the Association of Elderly Persons on the living conditions and income of elderly pensioners.

The proposals will be implemented over a period of four years and include a substantial increase in the pension payments of the social security system and a simplification of the benefit system through a merger and a cut in the number of benefit classifications. The intention is also to soften the provisions on benefit curtailment in respect of the income of a spouse and other income of the benefit recipient. Home assistance services to the elderly will be sharply increased and increased funds will be devoted to the construction and operations of nursing homes in order to shorten waiting lists for nursing home care.

The total cost of these measures is assessed at nearly 12 billion krónur, a sizeable sum that is being devoted to improve the lot of elderly and disabled persons.

The issues and interests of disabled persons are also under consideration in a committee appointed by the Prime Minister. The committee is considering ways and means of enabling disabled persons to use their ability to work to its fullest extent. Special attention will be paid to work rehabilitation and measures that will encourage disabled persons to enter the labour market. The work of this committee is in its final stages.

The Government has emphasised that health services should be a part of public services financed from public funds, but at the same time seen it as reasonable to enter into agreements with others to provide health services in certain areas as circumstances arise. The aim is to present a bill to the Althingi in this session on the organisation of health services that clarifies the basic organisation of the public health service, while at the same time strengthening the right of health authorities to enter into agreements with others to undertake health services.

Madame President.
The construction project at Kárahnjúkar will be completed in a few months, and the new aluminium plant at Reyðarfjörður will commence production and provide a large number of high-tech jobs. Although these projects have been controversial, there is no doubt in my mind that they will render great returns for the entire economy. The question that we Icelanders must answer soon is how we intend to use our energy resources in the future. To my mind, it is reasonable that the nation uses its resources, but it should do so with due respect to nature and the environment. We can both use and enjoy in this regard and it is important to create a consensus around such a policy.

We Icelanders are a fortunate nation that has gone from poverty to riches over a very short period. We have been fortunate to use the opportunities offered to us and create new ones that have brought us a higher standard of living.

It is important that we continue on this path to increased progress and welfare. We must bear in mind that only we as a nation can govern our own fortunes. It is up to us to use the opportunities to continue building a prosperous society. It is the aim of the Government that I now lead to do all it can to improve the fortunes of us all.

On this occasion a year ago, I observed that we, the members of the Althingi, all had the common aim to make our good country better. This will become increasingly apparent in this winter before elections. But let us bear in mind that good intentions are not enough. If the right course of action is not chosen, there is the danger that the goal will be reached late or never.

I wish to welcome all honourable members back to work and wish that our deliberations will be for the good of the country and that our election campaign will be honourable in all respects.



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