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Address by the Prime Minister at the Annual Conference of the Iceland Chamber of Commerce

Sigmundur Davíð Gunnlaugsson forsætisráðherra ávarpaði Viðskiptaþing
Sigmundur Davíð Gunnlaugsson forsætisráðherra ávarpaði Viðskiptaþing

Icelandic version

Ladies and Gentlemen,

It is entirely fitting that the Iceland Chamber of Commerce should choose to examine the public sector at this conference. Public services account for 20 per cent of production in the economy and for nearly one third of all jobs. And even though the public sector's role in society has grown, the demands placed on central and local government are still increasing, for example in connection with technological developments, new standards, new requirements, enhanced consumer protection and greater supervision. Demographic trends, including the increase in the number of elderly people, will also place greater pressures on public spending in the coming decades.

These rising demands can be seen not least in the health services, where demand is growing rapidly as the elderly comprise a larger proportion of the population and new technology and new drugs appear on the market. Good health services are immensely important. They enhance the quality of life and raise the standard of living in Iceland. But they are also expensive. The cost of meeting an ever-rising level of demand for services therefore grows much faster than the production of value that is expected to meet it.

The small population in Iceland also poses a challenge to the public sector, both as regards the need to maintain infrastructure and services in a sparsely-populated country and, not least, because of the large fixed costs involved in maintaining a modern welfare society, in which the demands for services, greater standardisation, regulatory control and monitoring are growing.

To a great degree, the various political parties in Iceland are in agreement on public spending, even though raucous nature of political debate often gives the contrary impression. Of course the right and the left have different priorities regarding public spending, but the difference between them is not as great as it seems to be from the debates in the Althingi or in society in general. For example, the main bones of contention between the parties in debates on the budget proposals often concern sums that amount to only 1-2% of the total budget.  It is not more.

There have always been powerful forces pressing in the direction of greater public spending, and generally they have prevailed over the few who undertake the task of defending the Treasury. One of the best illustrations of this is that state spending per capita, excluding various offsets in welfare outlay, has risen eleven-fold from the foundation of the Republic down to the present day, from less than 150.000 ISK reaching nearly ISK 1,600,000 at 2014 price-levels.

If we look only at the second half of this period, state spending on each individual in Iceland has risen 50% above the increase in GDP, the measurement of production required to meet the operating costs of the Treasury.

Inevitably, public spending contracted immediately after the financial crisis struck, but it has since risen again. It has rarely exceeded the level of 2014, and will rise still higher in 2015.  Yet during these years of such high public spending, unusually strident and constant calls were made for cutting it back.  

How long can we go on in this direction? At some point we will reach the end of the road. Prioritisation in public spending will become ever more important. Success has been achieved in many aspects of state operations and efficiency has increased. Thus, there are forces that oppose the pull towards greater spending.

II

Increased restraint on spending and responsible management are matters of concern for the Government. Certain parties that we have not always seen eye-to-eye with, credit-rating agencies and international institutions, have heaped praise on our policy on central government finances in recent months. What is most important, however, is that a credible financial policy is starting to be reflected an improvement in the credit terms available to the Treasury. This means it will be easier in future for the state to maintain welfare standards in society.

Work on the proposals made by Government's task force on streamlining measures is proceeding at full speed. Most of the task force's proposals have been put into practice or are being examined in parliament, or else preparations on their application are well advanced in the ministries in question.

One of the task force's proposals was to place greater social restraint on spending, and in this connection I was pleased that the Iceland Chamber of Commerce held a conference to discuss the proposals last autumn. Many of the proposals call for the merging of state bodies and making changes to the service systems operated by the state.  The public system must be able to adapt the administrative network and public services to the technological advances and other changes that are taking place in society. We need more innovation in public operations, and in this field the state can learn a great deal from private enterprises that operate in a competitive environment.

III

Another of the Government's priorities is to simplify the regulatory framework. A careful examination is already made of draft legislation before it is approved by the Government and if it involves new restrictions on the business sector then attention is drawn to this fact. Also, a special assessment is made of whether legislation is necessary from this point of view. A handbook on the simplification of the regulatory framework has been published and distributed to Government ministries and state bodies.

I should mention here that success has been achieved in an experimental project on the simplification of the regulatory framework applying to the tourist industry and that under a bill on public finances which the Minister of Finance and Economic Affairs has submitted to the Althingi, major steps will be taken towards changing how the state handles public funds.

One of the Government's main partners in this work is the Consultative Committee on Public Supervisory Rules, which includes representatives of Business Iceland, the Icelandic Confederation of Labour, the Iceland Chamber of Commerce and the Association of Local Authorities. A task force has also been appointed to make a special examination of Icelandic regulatory bodies with a view to improving the efficiency, coordination and effectiveness of their functions.

We make extremely high demands regarding the volume and quality of public services. But at the same time it is obvious that spending cannot go on rising with the present level of economic production in Iceland. And as everyone knows, tax revenues are not an inexhaustible supply of funds either.

IV

The public sector has not been a leader in wage trends recently. It has been claimed that collective agreements made by the public sector have upset balance on the labour market and that wage increases to civil servants have been out of keeping with other wage trends. This is not true. Statistics on wage trends do not support assertions of this type.

Civil servants' wages rose slightly more than those of private sector employees in the twelve-month period up to the end of October last year: i.e. by 6.8% as against 5.9%. On the other hand, civil servants' wages have risen less than private-sector wages over the past ten years. Wage drift in the private sector is a major factor in this. When the public sector makes collective agreements similar to those made in the private sector, wage drift starts up in the private sector with the result that civil servants' wages then fall behind.

The state concludes collective agreement with only 12% of the labour market. The state made wage agreements with just under 90% of civil servants along the same lines as the private sector had done. The agreements made with the doctors and high school teachers, who together comprise about 10% of all civil servants and 1.5% of the total labour market, were different. In these agreements, substantial changes were made to the working arrangements and wage structures applying to the occupations in question. These agreements were also made to cover a far longer period: almost three years. Wage agreements of this type have also been made in the private sector with similar cost increases, for example with airline pilots. It is simply not possible to compare a short-term wage agreement made for one year, providing for a 3% wage increase and then a further three per cent in the form of wage drift, with an agreement that covers a longer period and includes substantial changes to the working structure.

For this reason the wage agreements made with the doctors cannot constitute a precedent for the agreements that lie ahead in the labour market. To judge by a recent survey made by Business Iceland, this point seems to be reasonably well understood in the community at large.

The purchasing power of wages has risen by 5.3% over the past twelve months. This is a tremendous achievement; to claim otherwise is simply not possible. A wage increase of 6.6% is translated almost entirely into purchasing power when inflation is under one percent. This success is largely due to the moderate terms of the wage agreements made by the social partners last year. The result is that the purchasing power of wages has never been greater than it was last November. Never. Not even just before the financial crisis. A lower tax burden on households and the adjustments made to mortgage debts have contributed to a further increase in household purchasing power.

It is sometimes said that Icelanders are better at tackling adversity than prosperity. Whatever one's view of this assertion, it certainly seems reasonable to ask what causes the irritation that is being expressed on many sides with the stability we now enjoy. There may be many causes, but perhaps I should mention three of them here.

Firstly, the constraints of the past few years had a great effect on people's standard of living and their expectations, and households were obliged to scale down their spending. At this juncture, the outlook is more positive and expectations have risen at fast pace. In other words, now that real successes are being achieved in the economy, people are scared of losing their share in the results.

Secondly, trade union leaders feel resentment in view of the wage increases granted to workers in the occupations I have mentioned who made long-term agreements with larger increases. People are asking whether the ordinary wage-earner is being expected to maintain economic stability while others travel as stowaways in the first-class compartments of the ship.

Thirdly, many people are convinced that imbalance in the division of wealth and income is on the increase.

Let us start with those stowaways. I understand this point of view, and reports of super-salaries and bonuses for those already at the top do nothing to assuage these fears; quite the contrary. There may be a need for changes in the framework of the labour market to tackle this problem. It is difficult to renew the nearly 300 wage agreements that have to be negotiated in each bargaining round in such a way as to ensure that they are all consistent with economic stability. Small and medium-sized groups who decide to take a path other than that which has been marked out with economic stability as a dominant consideration are often in a position to force their bargaining partners to make substantial deviations from the wage policy that has been laid down.

The strong position of these groups disrupts solidarity in society regarding a sensible outcome of wage negotiations. The social partners fully realise the reality of this situation. It is important that they come out and take decisive action to remove what they regard as the worst flaws in the framework. Otherwise it is unlikely that we will secure the necessary stability and order in the structure of the labour market.  The consequence of such approach could be that the framework around the wage negotiations will cease to exit.

Inequality in the division of this world's goods is a universal problem. According to a recent report from Oxfam, the 80 richest individuals own as much as the poorer half of the world's population. In only four years, the size of the first group has fallen from 388 to only 80. This is not a healthy development.

Despite everything, we in Iceland are lucky that the income inequality level here is one of the lowest in the world. All international studies show this, and have done so for a long time now. The incomes of the richest people here constitute a smaller part of the national cake than they do in most other places. Poverty is also less widespread in Iceland than it is in most other countries.

We should aim at making further improvements in our society by means of deliberate measures over a long term. I hope we have learnt that slow and steady wins the race. We will not improve people's economic position by pulling teeth from entrepreneurs and business managers, because prosperity in the business sector and prosperity in society as a whole go hand in hand. A strong economy based on real production is the basis of the welfare that we want all our people to partake of.

Obviously, it is important that the Government and the social partners make every effort to work together as smoothly as possible to secure these goals in the interests of the whole community.

It must be recognized that the nation's economic policies are decided by the democratically elected government. As Sir Winston Churchill pointed out, democracy is the worst form of government, except for all those other forms that have been tried from time to time. There would be nothing to be gained, therefore, if government policy were to be formulated by persons without a mandate from the people. The Government decides its policy after receiving advice from various quarters, including the social partners, whose suggestions exert a considerable influence on the eventual policy adopted, as these entities play a large role in the economy by deciding wage policies for the private sector.

I wish to emphasise that the Government keeps the door open for ideas. I urge the social partners to play a role in active dialogue with the Government where there is a chance to exchange opinions, make suggestions and give information. It is a cause for concern when a major player on the labour market rejects repeatedly contact of this type, because it is important that active dialogue of this type should take place. I call for such dialogue to take place even though those who take part may be in disagreement about certain matters.

It is up to the social partners to negotiate wages and terms on the basis of the economic conditions at any given time. The Prime Minister should not negotiate wages and terms. But he is entitled to have his opinion on collective agreements, just as the social partners do not hesitate to have their opinions on Government's actions.

For some time now I have been recommending that people give more attention to wage increases in actual sums of money. I realize that lump-sum increases have had a tendency to be passed on up through the wage system in the form of percentage raises. But this is not a law of nature. If we look back over the past eight years, we find that lump-sum raises have resulted in greater wage increases for the lowest paid than for those receiving average wages. It is important to continue on this path and to achieve still more in this direction.

We also need to reduce the disincentives and peripheral factors that create poverty traps. When the peripheral effects of taxes and benefits mean that people see negligible growth in their disposable income even when their wages rise, this will reduce both employers' willingness to raise wages and workers' incentive to work more or raise their productivity. This is a problem that can only be tackled by coordinated action on the part of the state, the labour movement and employers' organisations.

Finally, I should like to ask all those here today, and everyone else involved in these matters, not to take part in a game of leap-frog in the coming round of wage negotiations, and instead to keep the interests of the entire community in mind.

The main point is that we need to increase the production of value in order to raise wages and promote welfare. In collaboration with the business sector, the Government has greatly increased its contributions to research and development at the same time as it has sought to improve the operating environment of enterprises in these fields in Iceland. The aim is now that levels of spending on innovation, research and development in Iceland, as a proportion of GDP, will be among the highest in the world within a few years.

V

There has been much discussion recently about innovation and the conditions for growth which new companies find themselves in. Discussion of this type is positive proof that ours is a living society where there is a growing will to create, to try out new things and to make a profit for the benefit of entrepreneurs themselves and the community at large.

It is often said that there is a lack of capital available for innovation and that the Treasury does not play sufficient part. Of course capital is needed for innovation, but other things are needed too, not least the will to tackle the difficulties involved in breaking ground for new ideas and new ventures.

Could it be that we, as a nation, have failed to appreciate how great a part attitude plays? What attitude do we have towards pioneers who embark on something but trip over obstacles on the road?  Or those who manage to build something up and even make a good profit from it?

Somewhere I saw a well know entrepreneur in Iceland, quoted as saying that the fact that he had previously put effort into something that didn't work out proved to be an obstacle when he came to raise the capital to found a company in Iceland, while it made a very positive impression on the people he approached in venture capital companies in Silicon Valley.

The prevailing mentality in the environment and positive attitudes towards entrepreneurs are of great importance, both for those who go on trying even though things do not work out the first time and for those who succeed straight away.

It should be expected that the public, including employers, supported the business environment as their progress is the foundation of success. Likewise, it should be a fair assumption that the business community should carry social responsibility and support the general public. The interests of both groups go hand-in-hand.

VI

Let us now turn to our position in the international community. International trade is important for a small, open economy such as Iceland's. We need access to markets, free-trade agreements, investment agreements and double-taxation agreements, and in general constructive commercial contacts with other countries. We can achieve these things and benefit from them, and in fact we have already done this on a very large scale. Few states or groups of states enjoy such a tight free-trade network as Iceland does. The number of states with which Iceland has made agreements removing trade barriers of various types is fast approaching 70.

However, due to our geographical position, our natural resources and the structure of our economy, joining the European Union is not an attractive option for us. The majority of Icelanders have long agreed with this view. Whether we could secure a longer period to adapt to the EU's institutional system and regulatory framework is irrelevant; the system and framework could then undergo substantial changes after we had swallowed the bait. It is simply quite obvious what membership of the EU involves.

The standing of the EU itself is weak and it is plagued by internal problems. Its standing in the international community is becoming weaker due to rapid developments in other parts of the world. Over the course of about a century, the combined GDP of the largest countries in what is now the EU, i.e. Germany, Britain and France, has fallen from just over 20% of the global total to about 8%. There is nothing to indicate that this trend will not continue.

The adoption of the euro in Iceland would let new problems out of the bag instead of the old ones. Iceland's economy is tiny, and it is vulnerable to external shocks. It is less reasonable for us to expect long-term economic stability than it is for most other countries. We would not solve this problem by giving up the chance to control our own monetary policy; doing so would only mean that cycles of expansion and contraction on the labour market would replace fluctuations in the exchange rate.

None of this changes the fact that Iceland is a European country with good relations and trade with EU countries under the EEA Agreement, which has served our interests well for more than 20 years.

In the context of international trade, we should remind ourselves that agriculture is domestic production in the same way as domestic industries and commercial activities. There too, employers must demonstrate a sense of social responsibility. Only 10% of global agricultural produce is sold across borders. In Iceland about 50% of agricultural production is consumed at home. Instead of wasting our energies on reducing this proportion to 45%, it would be sensible for the economy to play a part in utilising the opportunities that are available to the agricultural sector. The Government has been prepared to negotiate on the lowering of tariffs, but these things have to happen in agreements with other countries. No country is going to yield its position without getting something in return. Such a move would not be to the protection of Icelandic interests.

From the claims that are sometimes made in discussions of these matters, one might have the impression that Iceland is some sort of world leader in tariffs and duties, but this is by no means the case. For example, the EU imposes tariffs on roughly twice as many categories of goods as Iceland does, and it pays subsidies for the export of goods that are not needed on the home market. This has not been done in Iceland for about 20 years now.

VII

Our position in the global community is coloured not least by the capital controls that we have in force. They were resorted to as a necessary evil at the time, and we need to remind ourselves regularly about the damaging effects they have. However, we cannot blame the capital controls for all our troubles. The globalization of trade and investments can always mean that we will see strong companies moving overseas, as we have recent examples of.

The United Kingdom and Switzerland have for example a great attraction for business, not the least innovation companies from the Euro-area.

The anticipated arrival of Costco in Iceland, on the other hand, is another recent example of what an attractive investment opportunity Iceland is in spite of the capital controls.

The pressure to lift the capital controls does not come from households, since very few of them are directly affected in the course of daily life. And when capital controls have been in place for so long, there is a danger that we will start to feel quite happy in the shelter they give. An industry has come into being in connection with these controls, absorbing the talents of people who would be better employed in activities that created value; market prices are distorted because of the controls; Iceland's competitiveness is reduced.

The good news is that work on lifting the capital controls is progressing well. Obviously, it is necessary to take many interlocking factors into account. Everyone present here today knows that a precondition for lifting the controls is that the debt positions of the defunct banks must be resolved in such a way as not to threaten economic stability. There can be no compromises about this.

The insolvency estates of the banks themselves have not proposed any realistic ways of resolving the problem. Instead, the claimants are vigorously defending their own interests, with large numbers of Icelandic lawyers, PR officers and others on their payrolls, and are trying to put pressure on the Government with publicity spins of various types.

But we should remember that with the emergency legislation, the restoration of our banks and the imposition of the capital controls, the claimants have been given a pampered environment; they have been fed well. And this has been done even though a more appropriate course of action would have been to fine the companies for the damage they caused to the whole nation, as has been done in many other countries.

I should like to make it clear once again here that in everything it does to lift the capital controls, the Government will have the interests of the nation, of our homes and of our companies as its guiding principle. The nation has already sustained a heavy blow. It is out of the question that the nation should be expected to shoulder further burdens. Therefore, the capital controls will only be raised when it is economically defensible to do so.

The lifting of the capital controls is the most pressing issue in Iceland today. It is necessary that the Government, parliament, business enterprises, the social partners and the public stand firmly together in the defence of their common interests.

VIII

Ladies and gentlemen,

It is important that we join forces and avoid talking as if everything were going to the dogs in Iceland. We live in comfortable circumstances and huge opportunities lie open to us. We should welcome perceptive comments on what improvements could be made, and ignore pessimistic and destructive grumblings. We must realize that our glass is far nearer full than empty. 

Iceland's future is bright. We are working our way out of a snowdrift that formed in the boom years which ended in disaster; we must learn from this and avoid a repetition. Out next steps must be to utilize our natural and human resources and save up for the future.

A person who lacks self-confidence will not achieve results, and the same can be said of communities, which are made up of individuals. A nation must believe in itself and also that it is possible to do things in a different way and to do them better. As the German poet Goethe put it: “The important thing in life is to have great aim and to possess the aptitude and perseverance to attain it.”

We, as Icelanders, should allow us to aim high but we need to mobilize our skills and practice patience in order to reach them.

Thank you.

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