The first Fiscal Strategy Plan of the coalition Government formed by the Left-Green Movement, the Independence Party, and the Progressive Party, reflects the Government’s commitment to ensure that society as a whole will enjoy the benefits of the ongoing economic growth phase while strengthening social stability and the quality of life for the future.
The plan ensures that the policy of maintaining a fiscal surplus will continue, while promoting responsibility and steadfastness in public sector activities. The increased strength of the Treasury, lower interest costs, and the prospect of diminishing demand pressures in the economy put the Government in a good position to follow up on its goals of stepping up investment in social infrastructure and further supporting social welfare services.
Since 2013, the outstanding debt of the Treasury has been lowered from ISK 1.500bn to less than ISK 900bn, or by a total of ISK 600bn. Lower debts along with the resulting reduction in interest costs have contributed towards a growing fiscal space. In addition, GDP has doubled from 1998 and is now higher than ever before. In spite of significantly increased allocations to all key spending areas, the public consumption of the central government will remain constant relative to GDP over the period, at around 11.2%. The increase in allocations therefore aligns well with the economy’s capacity to finance improved services for the public at large.
Substantial investment in infrastructure
Investment will grow markedly in 2019, or by just over ISK 13bn, and will peak in 2021. Over the period as a whole from 2019 until 2023, investments in all expenditure areas is projected to total ISK 338bn.
Large-scale investment in transportation infrastructure will be financed in part with a temporary increase in dividend payments from State-owned financial institutions. In all, investment allocations are projected at ISK 124bn over the period, and for three years beginning in 2019 a special annual contribution of ISK 5.5bn will be added. The nationwide installation of fibre-optic cable connections is scheduled for completion in 2020.
Total investment in hospital services is estimated at nearly ISK 75bn, most of it for the construction of the new Landspítalinn hospital on Hringbraut. Construction of a new treatment centre for the hospital will begin in 2018, and the bulk of construction will take place in 2020-2023.
The fiscal plan also provides for further development of infrastructure and other projects pertaining to popular wilderness areas and other tourist destinations.
Other large investments include the purchase of helicopters for the Coast Guard and construction of nursing homes as well as the House of Icelandic Studies.
Allocations to healthcare will total about ISK 249bn per year by the end of the period. The aggregate amount will have increased by about ISK 40bn from 2018, or more than 19%, in real terms. Apart from the construction of Landspítalinn hospital and real growth in the healthcare system, particular emphasis is placed on mental health services, on strengthening primary healthcare centres, and on reducing patients’ co-payments.
Allocations to social and housing affairs and benefit payments for the elderly and disabled will total about ISK 226bn through 2023. The cumulative increase in allocations totals ISK 28bn, a 14% increase in real terms. Changes are planned in the benefit system for disability pensioners so as to improve their living standards and promote participation in the community. It is also planned to increase maximum childbirth leave payments and lengthen the childbirth leave period.
In education and culture, allocations to university-level education will increase markedly. Contributions to universities were increased by more than ISK 2bn in the budget for 2018, and an additional increase of over ISK 2.8bn is planned for the period covered by the fiscal plan. The contribution per student increases as well, both at the high-scool and university level. In the area of arts and culture, significant funds will be devoted to an action plan for language technologies, in addition to the large allocations made in the 2018 budget. The country’s main libraries will be strengthened, and professional artists’ stipends and project funds will be supported.
Allocations to environmental affairs will be increased by nearly ISK 4bn over the period, an increase of 35% from the 2017 budget. Preparatory work for the establishment of a national park in the central highlands will move foreward, land patrolling will be supported strongly, and allocations for the reduction of greenhouse gas emissions will be increased in line with the objective of making Iceland carbon-neutral by 2040.
In addition to an increase of ISK 900m for public security and criminal justice in the 2018 budget, it is now planned to increase allocations by nearly 14% in 2019. It is planned to improve border control and integrate border administration, in part based on Iceland’s obligations under the Schengen agreement. In addition, allocations for law enforcement and the operation of the Coast Guard will be increased by over ISK 800m.
In the field of foreign affairs, it should be noted that allocations for development aid will increase from 0.26% of GNI this year to 0.35% by 2022. Contributions to the EEA development fund also increase over the period, and increases for defence cooperation with the US and membership of NATO are also planned.
The Government’s aim is to continue to reduce the taxburden, make taxation fairer, and ensure effective tax monitoring. The Government intends to consult with the main social partners about plans to reduce the tax rate in the lower bracket of the income tax by 1 percentage point, in stages, and simultaneously to undertake a comprehensive review of the personal income tax system, alongside a review of benefits systems. Of particular concern is public support for families with children and housing support, with targeted financial assistance to less well-off households.
The payroll tax is to be lowered by 0.25% in 2019, from 6.85% to 6.6%. Further reduction will depend on, among other things, the results of consultation with the social partners concerning changes in labour market benefits funded with payroll tax, and the Treasury overall balance.
Value-added tax on books will be eliminated at the beginning of 2019, and a year later, payments of royalties collected by recognised rights-holders’ associations will be taxed as assets and not as income.
The special bank tax will be reduced from 0.376% to 0.145% over the period. Tax concessions for research and development costs will be increased in 2019, with the aim of removing the ceiling on them later in the period. The tax base for investment tax will be reviewed with the aim of taxing real returns. The impact of those changes will emerge in 2020.
At the beginning of this year, the carbon tax on fuel was increased by 50%. It is planned to increase it by 10% in 2019 and another 10% in 2020. Ways to collect fees from tourists will be explored. The aim is to generate revenue from 2020 onwards.
Good cooperation with the labour market and continued debt reduction
The economy is well balanced at present, after strong growth in recent years. According to official economic forecasts and analysis, the outlook is for slower growth in coming years. The Government emphasises successful cooperation with the social partners so as to preserve economic stability and enhance social welfare. In this way, it will be possible to work towards favourable results from wage negotiations in coming years, so as to preserve the unusually strong real wage growth that has been achieved in recent years, through moderate pay rises that will continue to deliver increased purchasing power to households.
The fiscal plan assumes that there will be a continuing surplus on central and local government operations in each year covered by the plan, in accordance with the Fiscal Policy Plan that was presented together with the 2018 fiscal budget and has now been approved by Parliament. Treasury debt has been reduced markedly from the 2012 peak. The objective is to lower total public sector debt from 36% of GDP in 2018 to less than the legally stipulated ceiling of 30% of GDP by end-2019, a year earlier than envisaged in the Fiscal Policy Plan,and that the debt level will have declined to 22% of GDP at the end of 2023.