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Ministry of Finance and Economic Affairs

Rising from the Ruins 4

Steingrímur J. SigfússonThe tasks ahead, Part 4.

Previous articles have looked at the causes and consequences of the banks' collapse, the success which has already been achieved in combating the recession and the national economic situation. While we can be proud of what has been achieved, there is no denying that plenty of tough challenges await resolution. To start with, we can take a look at what heads the list domestically. What needs to be resolved in our dealings with parties abroad will be examined subsequently.

Re-establishing fiscal balance

The fiscal challenges are without doubt one of the most difficult tasks we face. As previously mentioned, considerably success has already been achieved in this respect in 2009. Efforts to cut back and economise in the public sector have met with general understanding and willingness to co-operate. The estimated Treasury deficit this year is just under ISK 100 billion. This has to be reduced considerably in next year's budget, so that the primary balance, i.e. state operations excluding financing cost, will be in surplus that year.

To do so, large-scale fiscal adjustments amounting to some ISK 43 billion will be undertaken, approximately ISK 32 billion of which will be reduced expenditures while ISK 11 billion in additional revenues will be collected. These actions will be difficult, even painful, but are unfortunately unavoidable. The good news is that this will mean the worst is over. Both 2012 and 2013 will be easier to deal with and the extent of cost-cutting required in those years should be considerably less, if the forecasts for economic recovery prove roughly correct.

Medium-term co-operation programme

Wages are another major issue that needs to be dealt with in coming months. At the end of this year practically all collective bargaining agreements, in both the private and public sectors of the labour market, will be up for renewal, at least if agreements have not been reached before that time. Resolving this successfully is extremely important. Just over a year ago, the social partners, municipalities, the Farmers' Association of Iceland and the state concluded a so-called Stability Pact. It has become fashionable to speak of this co-operation in derogatory terms, but few people have mentioned how enormously important and even vital it is for us to pull together in these difficult times. This writer at least continues to hope that we will once more be fortunate and find some sort of co-operation programme for the coming year or two where the government, the social partners and other organisations work through a common forum on the most urgent economic and labour market issues, fighting unemployment etc. Anyone refusing to take part under the current conditions will bear a heavy responsibility.

Fisheries policy

It is also extremely important to successfully resolve disputes on arrangements for fisheries management, in particular concerning harvest or use rights to marine resources. Decades of dispute on this issue have gotten us nowhere and it has been repeatedly demonstrated that the nation is dissatisfied with the current situation. The fisheries sector is also overly indebted, not least as a result of purchasing catch quotas at inflated prices, although there are other reasons as well. Such a situation cannot be allowed to persist indefinitely. The government and stakeholders share a joint responsibility, for the benefit of the entire nation, to find an acceptable solution. It is urgent that the reconciliation process currently underway lead to a positive outcome, affirming the nation's common ownership of the resource while at the same time creating a solid operating environment for the fishing industry.

Economic significance of foreign-denominated debt

Following the Supreme Court judgement early this summer, it is now clear that at least part of the so-called currency basket loans are unlawful or non-binding. The conclusion that a major portion of the lending activities carried out for years in Iceland should now prove to be without basis in law is a strong censure of the financial system and its regulators. Borrowers who took out such loans with currency risk or similar loans which may be declared unlawful will benefit from a reduction in the loan principal, although there is uncertainty concerning just how these loans should be treated in other respects. While a reduction in the loan principal will have a positive impact on many debtors' positions, the impact on the financial system and financial stability is still unclear. The final outcome, both with regard to the scope of this issue and the interest question, will have major economic significance, as has already been pointed out.

Ownership and resource rent

In addition to the controversial acquisition of HS Orka by the Canadian company Magma through a Swedish shell corporation, which is currently under investigation, plenty of work remains to be done on reviewing and reinforcing the legal framework concerning the country's resources, with a view to strengthening public ownership of resources and control of them by Icelanders, to ensure the rent on resource utilisation. It is the conviction of this author that an increasing return can be obtained on the nation's common resources which should be a growing portion of state revenue in coming years and decades. A mere glance at the development of world electricity prices, never mind those for renewable energy, confirms the importance of ourselves realising the tens of billions of increased rent which should be available from current energy production, not to speak of any additions. The current government has resolved to make this happen.

Collaboration with the IMF to conclude in the latter half of 2011

The joint economic recovery programme of the government and the IMF is now moving ahead once more and, barring any additional delays, should conclude in late summer of 2011. The IMF presence here is naturally controversial and there are likely few Icelanders who would not have done whatever they could to avoid this. Having reached this point, the most important thing is to conclude this matter favourably and for Iceland to be able to stand completely on its own feet without such outside assistance and intervention.

Improving all public operations

Merging of ministries and institutions and restructuring of public operations has to be included among the most urgent priorities under the current circumstances. Extensive and ongoing alterations are planned for public operations with the objective of increasing cost-efficiency and economising wherever possible, but also the better to safeguard vital services and jobs in times of cutbacks. One aspect of this is the plans to merge and reduce the number of ministries, which in turn will facilitate merging and reducing the number of institutions under their auspices, making those that remain stronger. These actions are taken not only for economising purposes; the report of the parliamentary Special Investigation Committee also reveals that too many, widely distributed and feeble units are among the chief weaknesses of our public administration.

Battling unemployment

Although unemployment has not climbed as high as forecast, overcoming this menace has to number among our priorities.  The vitality of industry in general makes the greatest difference here, although large-scale projects are often spoken of as the only significant factor. Stability, declining interest rates and disinflation, together with all the actions to stimulate and encourage economic activity that can reasonably be undertaken, are the government's contribution. On this basis an environment of increased optimism and faith in the future needs to be built. The economic situation is a subjective phenomenon no less than an objective one, and as soon as confidence begins to grow once more, it releases a strong supply of energy. There are possibilities aplenty, and these will be explored later.
Steingrímur J. Sigfússon
The author is Minister of Finance in Iceland.

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