Althingi reconvenes now following an unusually brief recess – in a year we will not soon forget. It has been a very difficult time for the nation, because all of us suffered a shock when so many things we trusted failed. It is only natural for people to be angry or insecure, disappointed or hopeless, and to feel that they have been cheated.
Experts say that Iceland has suffered the largest currency and financial crisis that any country has ever experienced in peacetime. That we are grappling with difficulties of a much larger scale and complexity that other nations have ever had to struggle with.
But we can nonetheless be thankful that since catastrophe struck we have, as a nation, performed much better than the most pessimistic forecasts predicted.
We have engaged in a democratic exchange – we have held elections – we have taken major strategic decisions and we have managed to keep business going and maintain services far better than anyone predicted. I do not hesitate to say that in many areas of public administration, in institutions, enterprises, schools, healthcare and welfare services and local authorities, people have made an heroic contribution towards keeping the wheels turning.
We can be grateful that we Icelanders are in general hard-working people who are determined to work our way out of what ever difficulties beset us.
We now have to settle accounts, rebuild the collapsed structures and reorganise to make Icelandic society better than it was prior to the collapse. We stand at a crossroads in Icelandic history. The ideology of neoliberalism and unrestricted markets has collapsed. Ahead is the reconstruction of society on a new foundation of social democracy and solidarity.
We are in the midst of a painful settling of accounts. The Parliamentary Investigation Committee (Icel. Rannsóknarnefnd Alþingis) will deliver its report on the causes of the collapse in a month's time. It will be followed up with determination. The government has pledged to support the investigators as best it can in their difficult task and this has been done by providing funding, amending legislation and taking various other measures.
The trust which has been lost will not be recovered without a satisfactory reconciliation and without having those responsible face the consequences. Those guilty of misdeeds and violations of the law must be prosecuted. Social consensus cannot be achieved unless we do everything possible to reveal the truth. Nothing can be excluded.
People want an end to extravagance and greed and to remove power from the hands of those individuals who undermined both healthy business and industry and public administration. They do not want the same oligarchs and interest groups to continue enjoying their privileges as if nothing had happened. The people of this country, burdened with unemployment and falling incomes, want to see changes take place and this demand is fully justified. This demand is directed not least at the banks.
As Prime Minister I have written the banks’ Resolution Committees letters demanding answers as to whether they follow specific written rules and transparent procedures in deciding what enterprises, many of whom are technically insolvent, will be put back on their feet. The government is not prepared to accept anything under the table and insists that equal treatment be ensured.
The Icesave issue is part of this settlement. It has proved an extremely difficult task for me as for everyone else. Unfortunately, placed in the context of other burdens left by the collapse, with which the nation will have to struggle in the coming months and years, it is not our largest problem.
The Treasury deficit and the Central Bank’s technical insolvency as a result of write-offs of loans to collapsed financial institutions are of greater magnitude in terms of estimated real figures. Because of the funds lost, we are facing enormous expenditures which require cutbacks and tax increases.
When asked whether I consider it fair that Icelanders guarantee the debts of alleged financial buccaneers, who in the case of Icesave used the nation’s good repute irresponsibly, I have replied in the negative. It is unjust to let Icelanders pay the price of flawed European Union legislation.
Nor is it fair that the British and Dutch wash their hands of the failure of their own financial supervisory bodies, no less than that of our own, in the Icesave question, and it is extremely unfair of them to place obstacles in the way of co-operation between Iceland and the IMF. We became the victims of a tacit agreement, by all the countries with which we primarily trade and otherwise deal with, on both sides of the Atlantic, that it was necessary to defend flawed financial market regulation to prevent bank runs throughout the world.
We stood alone and still do in the Icesave issue.
An assessment of the cold reality tells me that we have no choice but to settle the Icesave accounts. If we are not granted loans by the IMF or neighbouring countries, and funds in the near term to strengthen our foreign reserves, the removal of currency controls will be postponed, the exchange rate will remain low, reduction of interest rates will be delayed and Iceland’s sovereign rating fall through the floor, with the result that all refinancing of credit will become much more expensive.
That, in turn, would threaten economic reconstruction and boost unemployment and in so doing add to the difficulties facing Icelandic households. If we do not intend to become isolated as a nation and close the door on our relations with the international community, we have but one choice, to conclude the Icesave issue.
It is this assessment and the interests of the people of this country which determines my position. Those who now cry the loudest and propose other solutions are jeopardising the interests of the Icelandic people in both the short and long term. We do not have any choice here. I ask people to bear that in mind.
Althingi came to the same conclusion when it passed a parliamentary resolution entrusting the executive power to conclude an agreement in the matter almost a year ago. Three governments, involving the Independence Party, the Social Democratic Alliance and the Left-Green Movement, have affirmed in their dealings with the international community that we Icelanders intend to fulfil our commitments, disagreeable as they may be. These are the facts of the case and this is the challenge we face.
We have to set our sights on the future.
The government is currently undertaking the most wide-reaching restructuring of public administration and its institutions since the Republic was established. The regional division of services will be reformed, the country will become a single tax region and the offices of the Director of Internal Revenue and regional tax directors will be merged.
Police, juridical and administrative districts will be reduced in number. Healthcare institutions, employment and welfare agencies, and various institutions in the transport, environment and industrial sectors will be integrated or merged.
A major restructuring of government offices is already underway which will reduce the number of ministries from 12 to 9 during this electoral term. Before the end of this year a bill will be submitted to the Althingi on a Ministry of Employment, which will replace the present Ministries of Fisheries and Agriculture and of Industry. The Ministry for the Environment will be strengthened as the Ministry of Resources.
Reforms to increase democracy will continue to be near the top of the government’s agenda. Work on a constitutional assembly, referenda, selection of individual political candidates, political party finances, increased transparency in public administration, laws on ministerial responsibility and more, all measures aimed at reinforcing democracy, will continue.
Practices and procedures will be altered by adopting codes of ethics for ministers and public officials, a new law introduced on appointments to the judiciary, together with a new information act and review of laws on the appointment of public officials.
The banks’ reconstruction is now at last in its final stages and the prospect is that foreign creditors will elect to safeguard their interests by participating in banking operations and the reconstruction of Icelandic business and industry. If things proceed as planned, well financed banks with extensive international connections will be able to play an active role in the revival of Icelandic enterprises while inflation and interest rates subside rapidly in coming quarters.
Iceland’s application for EU membership also represents a clear strategy for the country’s direction and vision for the longer term. The application and the reception it has received send a clear and reassuring message to the outside world. I am convinced that as an applicant country Iceland will acquire a stronger status than otherwise.
The painful and drastic measures announced in the budget are unavoidable. The country’s economic independence is at stake and thereby the basis for us to maintain the necessary welfare and social services in coming years.
The nation asks, how much is the public debt. I will answer this clearly: The state’s gross debt will grow from just over ISK 300 billion in 2007 to over ISK 1700 billion in 2010, or by almost an entire year’s GDP – ISK 1400 billion. Not one króna of this is due to Icesave.
Some ISK 350 billion of this is due to the Treasury deficit, another ISK 350 billion to loans from friendly countries to reinforce currency reserves, ISK 300 billion to recapitalise banks and financial institutions, around ISK 150 billion is due to exchange rate developments on older loans, and around ISK 300 billion is needed to avoid the insolvency of the Central Bank of Iceland. State debt resulting from loans written off by the Central Bank of Iceland is equal to three times the cutbacks in the 2010 budget from this year’s budget.
As a result of these growing liabilities, the state’s interest expenditure of some ISK 100 billion has become the second-largest item in the budget, only exceeded by expenditure for welfare and social security. If nothing is done to change this, the state’s interest burden will end up as the largest expenditure item. Expenditure on unemployment and other benefits has also increased by tens of billions, as we know, while revenues have collapsed due to the economic contraction.
If we continue in coming years with a fiscal deficit of some ISK 200 billion annually, as has been the case now for two years, the enormous interest burden will drain all the vitality from our welfare system. We will have no funds to build the society in which we want to live.
This pressing problem has nothing to do with Icesave nor with the IMF. Anyone contending this is deluding people. It makes no difference whether the IMF stays or leaves, whether we pay Icesave or not.
We have to sharply reduce the fiscal deficit and the growth of public debt. The financial future of our children and coming generations is at stake. The struggle with the budget deficit in coming years is a question of whether Iceland will maintain its economic independence or not. Are we going to lose this struggle? I say no. Not while I’m on duty.
The government will not be deterred in altering the taxation system to increase equality and justice in society. This is a major change in direction from the era of the Independence and Progressive Party power. During that time the country’s richest families were allowed to grab an ever-larger share of the nation’s disposable income.
During the period from 1993 to 2007, the richest families in Iceland increased their share of disposable income fivefold: the share of 1% of Iceland, the richest families, rose from 4% to 20% of the country’s total disposable income. This was an inauspicious policy trend for Icelanders, a strategy of increasing inequality culminating in disaster. This strategy has now been definitively discarded. Anyone who criticises the government’s taxation policy will have to point out where they wish to make greater cutbacks or whether they want to increase public debt.
The government’s plans for actions to lighten debt service and relieve the debt problems of individuals and households have now been presented. They include a general adjustment together with new, special remedies where every effort is made to deal with the difficulties of as many people as possible fairly, equitably and with moderation.
This will enable a large number of households and individuals to regain their financial balance. People who otherwise would have been threatened by serious default can now get back on their feet and have more money at their disposal. For those who appeared trapped with no escape, routes are opened up to resolve their difficulties and enable them to look forward to the future.
The Icelandic students’ loan fund has been reinforced in order to boost basic loan support by 20%. This is a major step forward in helping people to study while the contraction persists in order to be better equipped when the labour market picks up once more. Proposals for labour market and vocational training remedies for unemployed young people with limited education are expected shortly.
The division of tasks among healthcare institutions in Iceland will be redefined and administrative bodies harmonised. Efforts will continue to reduce the cost of pharmaceuticals and for specialised medical services and rehabilitation.
The government will formulate an energy policy which emphasises boosting green industry by utilising renewable energy in a sustainable and socially responsible manner to create value and employment.
Framework legislation on benefits offered to foreign investment and on support for industrial innovation in Iceland is to be adopted The increased budget allocations in recent years to competitive funds will be defended. Funding devoted to supporting the travel industry has never been greater in real terms. It will be strengthened still further through co-operation in financing marketing and promotion efforts abroad and by fostering new opportunities.
The government is considering major changes to the Act on Financial Undertakings and laws on banking secrecy, deposit insurance, UCITS and investment funds. All of these amendments are considered necessary in order to regulate the financial market after the collapse and to prevent a repeat of financial sector catastrophe.
The government has sought broad consultation to prepare a programme for development throughout Iceland in tandem with the country’s new regional structure. It aims to make Iceland among those countries with the best premises to ensure a good and desirable quality of life for all ages.
The government is presently drafting proposals for the next coastal fishing season, in view of the experience gained in this fishery last summer, which brought new life to many communities. Proposals for changes to the fisheries management system will be presented to Althingi this winter when the review committee has reached its conclusions.
The government will reinforce the position of natural protection with a review of the Nature Protection Act. We expect a Master Plan for Utilisation of Renewable Energy Resources to be presented to the current session. The government is also working on drafting an action plan aimed at reducing emissions of greenhouse gases.
Everyone struggling to overcome difficulties can benefit from focusing not just on the negative aspects. All around us there are positive signs from industry, culture, NGOs and public administration which should stimulate and encourage us. Positive signs of mutual support, solidarity, determination and diligence which before long will bring us a new and better society. We need to encourage and foster these positive shoots in our community.
We can rejoice at the greater than usual surpluses in Iceland’s external trade balance this autumn, rising aluminium prices, higher value of fishing catches, better prices for various seafood products, good prospects for fisheries, sizeable increases in revenues from foreign travellers and OECD forecasts of GDP growth as early as next year and revival of international trade. This is positive for Iceland because our recovery will be export-driven.
The ISK exchange rate has remained steady during the past month, despite substantially reduced intervention by the Central Bank in the currency market. FX market turnover also appears to be increasing and the accumulation of corporate foreign currency deposits in Icelandic banks has stopped.
Credit default swap spreads on Icelandic debt continue to fall, inflation is expected to subside rapidly this winter and interest rates to decrease. It is also evident that inflation has been lower than forecast in Iceland up until now while the contraction has not been as great as feared.
There are many positive signs and many major tasks on the horizon. I can mention the power plant Búðahálsvirkjun, renewal of the aluminium smelter in Straumsvík, construction of the aluminium smelter in Helguvík, a server farm and the concert hall and conference centre under construction. Major projects have been discussed with pension funds, including road construction on Suðurlandsvegur, a new national hospital, enlargement of the air terminal at Akureyri and a travel centre in Reykjavík. Work is underway in earnest on all of these projects, in part on the basis of the Stability Pact.
There are difficult times ahead where we, each of us in our own venue, will struggle with reconciliation, reconstruction and restructuring of our own lives and that of the nation. The government has presented a strategy and plans to lead the country out of its difficulties. We are putting public finances in order, which in fact is Iceland’s most important independence issue today.
We are restructuring the public institution system which should have been done long ago. We are pushing forward with democratic reforms and a variety of rights which have been pushed aside for years without being resolved. We are correcting many types of injustice and removing privileges which have existed for far too long. These improvements should not have to wait until times improve. They are necessary if we intend to build a better and healthier welfare society from the ruins of the collapse.
I am convinced that this is the will of the great majority of Icelanders and we shall work towards this together.