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Ministry of Finance and Economic Affairs

Fiscal Policy Statement for the years 2018–2022

The principal objective of the Fiscal Policy Statement is that a sizeable surplus will be maintained on public sector operations as a whole, i.e. including public corporations, over the period, or around 3% of GDP each year. Section A of Central and Local government, i.e. operations financed with taxes excluding public corporations, will deliver an initial surplus of 1.4% of GDP, followed by a gradual decline to 1%.

This sound outcome, which is conducive to restraining rather than stimulating continued demand growth in the economy, will allow for sufficient fiscal space in order to improve core public services and infrastructures and sustain other government efforts aimed at ensuring that the current economic growth phase will benefit the public at large.

The Fiscal Policy Statement is presented on the basis of the recently adopted Act on Public Finances, which stipulates that such a policy shall be presented as soon as possible after the formation of a new Government and no later than concomitant with the next fiscal budget proposal is presented.

The Act requires that the Fiscal Policy Statement sets targets for the scale of operations and net lending balance, as well as for developments in assets, debts, and long-term liabilities, both of the general government and the public sector as a whole, for a period of at least five years. Targets specified in the policy statement shall be presented as percentages of GDP. The policy shall be based on five principal values which  concern the short- and long-term sustainability of public liabilities; general prudence regarding, for instance, the balance between revenues and expenditures; economic stability; predictability in policy and execution of plans regarding developments in public finances; and transparency, which entails, among other things, clear and quantifiable medium-term objectives and regular reporting on their progress. The fiscal policy shall also satisfy the conditions specified in the Act on Public Finances concerning numerical fiscal rules on developments in the net lending balance and the level of long-term debt. The main purpose of the fiscal policy is to contribute to medium-term economic equilibrium so as to achieve as much stability as possible in the balance sheets of businesses, households, and public entities.

The Fiscal Policy Statement is intended to bring the following to the fore in broad terms: first, what the economic impact will be of intended developments in public finances, in view of current economic forecasts; and second, how their administration will comply with both the aforementioned five principal values, such as stabilisation, and with the numerical fiscal rules. In the annual Fiscal Policy Plan, on the other hand, the authorities' political priorities and plans are presented with much more elaboration, including plans for revenue generation, tax measures, improvement of public services and infrastructures, and other policy initiatives in public sector operations.

On the basis of the current economic and fiscal outlook, the main fiscal objectives for the next five years are as follows:

Share of GDP, % 2018 2019 2020 2021 2022
Public sector, Section A:          
- Net lending balance ................................. 1.4 1.2 1.1 1.0 1.0
- Long-term debts* ........................................... 33.8 31.0 28.5 27.3 25.0
Public sector as a whole, total          
- Net lending balance................................. 2.9 3.0 3.0 3.0 3.0
- Long-term debts* ........................................... 59.8 55.0 50.5 48.3 45.0

*Gross debt net of pension liabilities and accounts payable/receivable and net of cash and bank deposits; cf. Article 7 of the Act on Public Finances, no. 123/2015.

  1. The surplus on the general government net lending balance for the period 2018–2022 shall be at least 1.4% of GDP in 2018, 1.2% of GDP in 2019, 1.1% in 2020, and 1.0% of GDP per year thereafter.
  2. Total debt of Section A of the public sector shall fall to below 30% of GDP by year-end 2020 and shall not exceed 25% of GDP by year-end 2022.
  3. Total public expenditure will grow by 0.6% of GDP year-on-year in 2018. The scale of public sector operations throughout the period will develop in a manner that promotes economic stability.

The fiscal policy is based on Statistics Iceland's macroeconomic forecast, published in November 2017, which covers a horizon from 2017–2023. It should be noted that the fiscal policy is based on a favourable economic forecast for the entire forecast horizon, although GDP growth in coming years will be more subdued than the 2016 growth rate of 7.4%. GDP growth for 2017 is forecast at 4.9%, and the accumulated GDP growth over the duration of the fiscal plan will be just over 14%.

The Fiscal Policy Statement aims to ensure an appropriate balance between public expenditures and revenues while fostering sound conditions for fulfilling the plans and supporting the political objectives on which the Government has reached a consensus, as is outlined in its coalition agreement. The position of the Treasury is stronger than it has been in years, and the economic outlook on which, by law, fiscal policy must be based is positive; nevertheless, it is appropriate to take seriously and respond to signs of a slowdown in the growth of the domestic economy in the next few years. The improved position of the Treasury will be used to strengthen infrastructures – both social and physical – while  simultaneously placing emphasis on an expenditure policy that seeks to provide broad-based welfare services and promote equality and social cohesion. At the same time, care will still be taken to continue to lower the public debt level to ensure that the Treasury will have the means to respond to recessions or shocks.

According to The Fiscal Policy Statement, the consolidated net lending balance of central and local government operations will generate a sizeable surplus over the entire planning horizon, although the surplus will diminish slightly in the coming years. Two factors need to be considered in this context: On the one hand, economic forecasts project that GDP growth in the next years will become more subdued, and the outlook is in many ways more uncertain than before, particularly towards the end of the period. On the other hand, the stated objectives reflect the priorities of a new Government, which are detailed in the coalition agreement.

According to the Act on Public Finances, the Fiscal Council shall assess whether the fiscal policy complies with the principal values and numerical fiscal rules stipulated in the Act. The Council must complete its assessment and submit it to Parliament no later than two weeks after the presentation of the fiscal statement.

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