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Prime Minister's Office

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

Icelandic version

(The original speech as delivered in Icelandic takes precedence over the written text as translated here.)

I.

Ladies and Gentlemen,

A local tournament or global games?' is the theme of this year's forum, with the focus on the domestic service sector. That part of the economy known as the domestic sector generally receives less attention than the international sector, the resource sector or the public sector, which was under the microscope at this Chamber's Annual Business Forum last year. Yet the domestic sector is the largest, in terms of production and labour, and the importance of this wide-ranging sector is obvious. It compasses all local operations that serve the domestic market; in fact, it is the mechanism that keeps life in this country going. The opportunities for this sector therefore lie in doing things better, with lower costs, so promoting a better standard of living.

Employers and politicians have long said that one of the Icelandic economy's weakest points is low productivity. Iceland has achieved competitive levels of productivity in those sectors where it competes internationally – fisheries and power-intensive industry – but competition in the domestic sector lags some way behind. There, it is generally about 20 per cent lower than the average in Denmark, Norway and Sweden.

There may be various explanations for this gap – on our small market, businesses cannot benefit in the same way from economies of scale, our geographical position may protect us from foreign competition and consumer consciousness may be limited. But we must do better if we intend to secure a good standard of life in Iceland for future generations.

The report by the Chamber that is before this forum presents many interesting suggestions for raising productivity.

Competition and efficiency, or streamlining, are sometimes set up as opposites in Iceland. It is said that efficiency cannot be attained here because there are too many companies on too small a market. In some cases, of course, there may be some truth in this. But more monopolies, or oligopoly, can hardly be the right solution.

One way towards greater efficiency without sacrificing competition, could lie in drawing a finer distinction between infrastructure and services: permitting rivals to collaborate on the operation of expensive infrastructure which has limited impact on consumer choice and to reap the benefits of economies of scale, while giving no discount on the demand for competition in services where economies of scale are small.  In this way it would be possible to create value.

II.

Greater value creation is the pre-requisite for greater prosperity, and for countries with foreign debts – meaning most countries in the world – greater value creation is the pre-requisite for greater public spending, or public consumption, to use a more positive-sounding term which means the same thing. Those who are in favour of increasing public consumption are in favour of increasing public spending.

To be able to meet expenses, you need income, and for more income you need ... greater value creation. It all seems simple, and in fact it should be self-explanatory, but it isn't, and least of all at the present time.  

There are various indicators that we are experiencing a very interesting period. After the flaws in the global financial system, and in the financial systems of many individual countries or national groupings, were exposed, and access to information, both false and true, increased greatly, an interesting development has taken place in politics in many parts of the world.

Fringe political movements, politicians and ideologies have gained strength. They go under various names: socialists, communists, nationalists and anarchists.  They all claim to offer something new in opposition to the system, the old, corrupt system. But on closer acquaintance, what they are offering is simply a recycling of old ideas that have been tried again and again, always with bad results.  Another feature of these ideologies, politicians and political movements that are now gaining greater support is that they offer simple solutions: simple, but inadequately thought out.

Simple solutions may be the best, and may be just what is needed, when they work. But other problems call for more complex solutions. In either case, the solutions must be well thought out and logical.  And they have to stand up to critical discussion.

Many of the solutions that are now harvesting most of the attention and least of the criticism do not do this – so in fact they are not really solutions, but rather aims without solutions.

Whether we take the leading presidential candidates in the USA or the new popular parties on the European continent, everywhere we find people calling for increased spending and greater debts without mentioning value creation. They do not need to explain how the equation will work out; it is enough to keep their message simple enough and dress it up in phrases that sound sufficiently positive. And in many places, the rule is that the less substance there is in the message, the less criticism it will receive.

What do we find within our own borders? Here, a political movement that receives great support is canvassing the idea of having the state pay everyone in this country a monthly wage – of at least ISK 300,000, I believe – simply for being Icelanders! Irrespective of what they do or what other income they have.  I have yet to hear of anyone taking the trouble to work out what this would mean: a public expense item of about ISK 100 billion every month.

That is as much as the annual cost of our social insurance system, our state pensions and disability benefits, which have been rising even though many people think they should rise further.  It is under these circumstances that the suggestion is made that the state pay everyone, even the highest-paid among us, a fixed monthly wage.

I will not go here into the consequences this would have for productivity in our society, or the impact it would have on prices, or the obvious fact that those who are in the worst positions to start with would come out in even worse positions.  Suffice it to say that the cost of such a scheme would be about ISK 1,200 billion every year, nearly twice the Treasury's revenues, and it would still remain to find the money to run the health system, the schools and everything else.

Many, many demands are voiced for more spending without more income.

When it is asked where the money will come from, the most common answer is that taxes could be raised.

There are a surprising number of people who seem to think that taxation is a source of wealth, and they are even offended if you point out the vital connection between value creation and welfare. If somebody stands up and says it is important to improve the lot of the elderly and the disabled, or to improve the health system, and therefore we must generate more wealth, he is accused of being against the elderly, against the disabled and against having a better health system.

Those who point out that we have to service the national debt in order to give long-term support to our welfare system are accused of hollowing the welfare system out from the inside, even though at the same time far more is being allocated to welfare, unlike the situation that prevailed in the past.

An indication of how out of hand things have got is that if someone points out that a stupid means is being adopted, even though the end is good, he is immediately accused of being opposed to the end.

Why am I mentioning all this here? To point out that in politics there is no general agreement on the relationship between value creation and welfare, and it certainly cannot be taken for granted that the rapid and positive developments we have seen recently in the economy will continue if we lose sight of this relationship.

Utopian theories that went into hibernation after the border guards in Berlin lost their jobs are now stirring to life again. 

The shocks that hit the capitalist system which had become excessively greedy (and still is, in many places) could easily return in a rebound that would drown rationalism with little resistance.

It is worrying to see that, according to surveys, a far larger share of the population in Iceland than in our neighbouring countries considers that business enterprises have a negative effect on society. In Denmark, by contrast, welfare and a positive attitude towards the business world go hand in hand.

As I mentioned earlier, some economic sectors in Iceland have achieved great success by raising their productivity; this is in fact the case in sectors that lack productivity in other countries, such as fisheries and power-intensive industry. And it is these sectors, which have achieved so much in value creation, notwithstanding difficult circumstances, that are the most popular sectors in Iceland.

Or are they?  -No, probably not, in fact. 

It is not a good thing if the sectors that score success are regarded with suspicion.  In Norway, the fishing industry enjoys support both from politicians and from the general public: the Norwegian taxpayer pays the equivalent of ISK 20,000 in subsidies for each ton of fish brought ashore.

A few years ago I criticised some of the groupings in the business sector for their lack of support for the community, but it is also important that the community support the business sector and the creation of value that takes place there, even if only for selfish motives.

This is why it is important that politicians and employers should do more to highlight the relationship between productivity and welfare. If they do not do this, there is a danger that the old ideas about a utopian form of society will gain still further support, which in the end would damage us all.

But on the business side it is also important that people don't lose themselves in utopian visions of their own, for example ideas about total freedom of the market producing the best results.

I therefore urge the business sector to do more to demonstrate how important value creation is, and of course to think of their social responsibilities at all times.  And to reduce confrontation between sectors of the economy, for example to stop wasting energy in mocking farmers or imagining that it could be sensible to make Iceland a dumping-ground for over-production on the world market while other countries keep up customs barriers against our produce.

The community keeps the economy going and vice-versa.

This is why I should like to thank those who make the effort to run their businesses well, and also to ask them to work with us in letting the rational policies that have produced such good results in the past go on doing so in the future.

Even though most of the large, clearly-defined projects that my Government announced when it took power have already been completed, some large and important challenges still await us. We will solve them more easily if the economy goes well and works with us.

This is why we intend to continue to make a priority of improving the environment for businesses, and at the same time we urge employers to demonstrate that free competition works by increasing productivity and by letting lower taxes be reflected in lower prices.

We intend to go on simplifying the regulatory framework, and we hope that most people will agree that a better, simpler and clearer regulatory framework ought both to make it easier for employers to work and ensure that the benefits of a well-ordered society will be shared fairly between the people in this country.

We must work together to restructure the financial system, take ground-breaking steps in developing the housing system and continue the rapid development of the healthcare and welfare systems so that, amongst other things, we can guarantee pensioners a decent standard of living at the same time that the ranks of pensioners will swell.

The Government is now tackling the task of compiling budget forecasts for the next five years. Thanks to the stability contributions, which have reduced debt, improved interest rates and cut interest costs, government finances are now in better shape than before.

Nevertheless we face great challenges, not least because of the need for investment in infrastructure. Public investment has been greatly reduced since the economic collapse and the need for investment that will benefit the economy has mounted up.

Over the past year or two most discussion has focussed on the banking system, housing and health care. In all these areas, substantial and purposeful improvements are being planned.

My Government has increased funding, at fixed prices, to the health services in all the budgets it has presented.  We intend to continue to keep the health services high on our priority ranking now that we have managed to reduce Treasury debt and bring interest costs down.

In my Government's declaration to the doctors in connection with the conclusion of their collective agreements a year ago, I said we would stand firm on the policy that had been laid down in the budget specifying greater funding to the health services.

The declaration also stated it was obvious that the challenges facing the health services would not be solved solely with extra funding allocations. It would be necessary to strive for maximum utilization of these funds, amongst other things through productivity comparisons and measures to encourage efficiency and better quality in services.  Productivity is important not only when the state raises its income but also when it spends it.

Work is going ahead on this.  A task force has been at work on measures to improve the health services; this has been headed by Björn Zöega, who recently undertook to direct a hospital in Sweden.

Work on the reform of the housing system is progressing well. Four housing bills, which were prepared in full consultation with the social partners, are before parliament.

To judge by the comments that have been made on them by market players and MPs, they will receive support in parliament, though most people think some amendments will be called for.

The reason these bills have been presented is not least because of the difficult position that many renters have found themselves in and the problems faced by people of limited means in finding suitable housing.  The bills will solve the most urgent problems. They will make it easier for people to have a choice of housing types, though without changing the Government's general policy that the main focus should be on owner-occupied housing.

Owner-occupied housing is deeply rooted in the Icelandic consciousness, even though more people than before are now choosing other types of housing.  It is very positive to see reports stating that the share of first-time owners as a proportion of all property buyers is now growing. The Government supports the owner-occupied housing policy in various ways, for example through interest subsidies and the arrangement under the Debt Relief Programme by which authorisation was given for payment from private pension savings into the principal of housing mortgages.  Further means of helping young people to buy their first properties are now under consideration.

Other matters to be presented to parliament in connection with the housing market are being prepared in accordance with a report from the task force on a future housing policy.  

Work is also in progress on the examination of price indexation in accordance with the Government's policy.

It is likely that great changes will take place in the housing market during the current parliamentary term. Housing issues are closely related to the financial and banking systems. It is therefore important to complete the signposts marking out the route for the future structure of Icelandic finance market. This must be structured in such a way as to be able to serve Iceland's actual economic system in a responsible and successful way, and I look forward to discussing these matters in more detail over the coming year or two.

Even though antiquated political ideologies are making their appearance in the political arena, and the fact that the Americans intend to spend money on refurbishing an old aircraft hangar at Keflavík Airport is sufficient to revive cold-war nostalgia in some quarters, we have our minds on continuing progress in the future.

We hope for smooth cooperation and support in the work that lies ahead.

Ladies and gentlemen, next year the Iceland Chamber of Commerce will be celebrating its centenary. The Chamber is young and lively; it wears its age well and has never switched to a new ID number.  It has certainly made an important contribution to public debates over the past hundred years and exerted an influence.

Another evergreen hundred-year-old teenager that has played no smaller part in public affairs over the past century is the Progressive Party.

The Iceland Chamber of Commerce and the Progressive Party have not always been in harmony with each other through the years, but both have played important roles in creating a good society despite differences in their priorities. Members of the Progressive Party have sometimes criticised the Chamber, and vice-versa, even though there are employers in the Progressive Party and party members in the Chamber.

It is always an important moment when a new chairperson takes over at the Chamber of Commerce, and perhaps an even more important one now that often before as a woman takes the chair for the first time.

Hreggviður has been a powerful spokesman for the Chamber of Commerce and I give him my sincere thanks for our cooperation.  He was one of those who pressed hardest to have the management consultancy McKinsey & Company compile its remarkable report on the growth potential of the Icelandic economy in 2012. This led to the establishment of the Consultative Forum on Economic Welfare, of which Hreggviður was a member.

It gives me pleasure to say that it was agreed at the last meeting of the consultative forum in January to make a survey of the Icelandic tax system and make proposals on increasing its efficiency. This survey will be complete in the spring.

And it is the Vice-Chair of the Consultative Forum, Katrín Olga, who is the new Chair of the Chamber of Commerce. She has acquitted herself with great credit in the Consultative Forum and will no doubt be a powerful advocate of value creation as Chair of the Iceland Chamber of Commerce.

I look forward to working with her. Congratulations both to Katrín Olga and to the Iceland Chamber of Commerce.

Thank you.

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