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Prime Minister's Office

Statement of the Government regarding measures to reduce food prices and other prices

The Government has decided to implement extensive measures to reduce food prices:

1. Excise taxes on domestic and imported food, other than sugar and sweets, will be fully abolished as of March 1st 2007.

2. The value added tax on food will be reduced from 14 per cent to 7 per cent as of March 1st 2007.

3. The value added tax on other services and goods in the 14 per cent VAT bracket (books, magazines, newspapers, space heating, hotel services) will be reduced to 7 per cent.

4. The value added tax on other food that up to now has been taxed at 24.5 per cent will be reduced to 7 per cent at the same time.

5. The value added tax on restaurant services will be reduced from 24.5 per cent to 7 per cent at the same time.

6. The general import tariff on imported meat products, cf. Chapter 2 of the Customs Tariff Directory, will be reduced by up to 40 per cent as of March 1st 2007. This will be implemented in concert with continued measures to bring about further mutual tariff reductions in international agreements and better access to markets with Iceland’s main customer countries that will at the same time ensure the export interests of the Icelandic economy.

7. The Association of Dairies has decided to reduce the wholesale price of dairy products in real terms over the next twelve months. This will be achieved by keeping prices unchanged over this period at the same level as was decided by the Agricultural Price Board on January 1st 2006.

8. These measures are estimated to lead to a nearly 16 per cent reduction in food prices and a 2.3 per cent reduction in consumer prices next year. In addition, the reduction in the value added tax on other goods and services from 14 per cent to 7 per cent (books, hotel services, space heating etc.) is estimated to lead to a further 0.4 per cent reduction for a total of a 2.7 per cent reduction in the consumer price index next year. The purchasing power of households will increase commensurably. The impact on Treasury finances of these measures is assessed at 7 billion krónur on a full-year basis and at close to 6 billion krónur in 2007.

9. These reductions will bring food prices in Iceland down to a level comparable to the average level in the Nordic countries, based on data from Eurostat.

10. It is of prime importance to watch prices with care so as to ensure that the increases in purchasing power that the Government has now decided upon will be delivered to consumers. It is important that food prices in general will not increase over the next several months until the Government’s measures are implemented. The Minister of Commerce will therefore ask the Consumer Office and the Price Surveillance Office of the Confederation of Labour to carefully monitor retail prices over the next several months and years. The Minister of Commerce will also ask the Competition Authority to carefully monitor competitive conditions in the retail food market.

                                                                                                   Reykjavík, October 9th 2006

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