Icelandic households and businesses are in a strong position, and the public debt outlook has improved substantially. With moderate spending growth and continued advances in growing export sectors, there are opportunities to solidify economic foundations once again and foster an even stronger society. This is stated in the Government’s fiscal plan for 2023-2027, introduced today.
The position is favourable
The most extensive pandemic-related economic measures were taken on the basis of the Treasury’s strong position and have delivered undeniable results. Purchasing power has never been higher and continues to grow. Households’ financial position has never been as favourable, as is stated in the fiscal plan introduced today.
This can be seen clearly in the strength of Icelandic households and businesses. Unemployment peaked at 11.6% in January 2021 but subsided quickly as the year progressed. It now measures 5.2%, which is close to the pre-pandemic level. Unemployment is now expected to fall even faster than previously estimated, reaching about 4% during the term of horizon of the fiscal plan.
Inflation has risen recently but it is still far lower than in many comparison countries. In Iceland, it now measures 4.4%, according to the Harmonised Index of Consumer Prices (HICP), well below the EU average of 6.2%. Inflation is expected to subside with responsible fiscal and monetary policies and labour market developments. The strategy laid down in the Government’s fiscal plan contributes to this.
In 2021, an all-time record 7,000 people bought their first home. Even though interest rates have risen, they have increased from a historically low level. Households asset position is generally strong, with a large amount of accumulated savings. The share of households in arrears has never been lower than in 2021, when it measured 0.9% at the year-end.
In recent years, the Treasury has supported the construction of social housing for the rental market through the public housing system. Stabilising the housing market with the involvement of municipalities, the social partners, and the Treasury is a task of vital importance during the horizon of the fiscal plan, and the authorities will do their part to bring this about.
Fiscal sustainability reclaimed
An ongoing project over the next few years will be to safeguard Treasury performance and re-establish fiscal sustainability in the wake of the pandemic. The post-pandemic fiscal deficit has proven to be much smaller than previously anticipated, however.
Now that the pandemic is on the wane in Iceland, public discourse is centred on the economic impact of the war in Ukraine. Thus far, this impact has been seen not least in soaring commodity prices, compounding the effects of supply-demand mismatches following the pandemic. A surge in refugees and even greater global uncertainty could create other challenges further ahead.
Public sector debt did not hinder Iceland’s response to the economic repercussions of the pandemic, as there was sufficient scope to take on debt. Icelandic society stood on solid ground because of responsible economic policy during the years beforehand. Now it is of paramount importance to re-establish that solidity. The Government’s objectives centre on steadily narrowing the deficit and halting the rise in the public debt-to-GDP ratio no later than 2026. This will strengthen the country’s foundations and better prepare Icelandic society to respond to unexpected shocks in the future.
Focus on tech solutions and increased synergy in purchasing
Improved public service is not solely a question of increased spending. There are enormous opportunities in utilisation of tech solutions, remote services and digitisation, institutional mergers, and greater synergy in the purchase and operation of systems.
On the website Island.is, it is already possible to access over 900 State service procedures, digital mailboxes, and a number of self-service applications, including for childbirth leave, police clearance certificates, health insurance, and various Commissioners’ services. Over the horizon of the fiscal plan, digitisation efforts will continue, with the objective of making public services simpler and more efficient.
The benefits of digitisation in the form of streamlining and greater operational efficiency have been estimated at ISK 9.6bn per year at the end of the five-year investment initiative currently underway. In addition to this is the indirect benefit to the whole of society, in the form of shorter processing times at public institutions and time saved by individuals and companies, which could total as much as ISK 20bn.
Over horizon of the fiscal plan, spending on healthcare weighs heaviest, at 31%, followed by spending on social, housing, and insurance affairs, at 27%. In all, nearly 60% of total expenditures fall into these two categories. The third-highest expenditure category is education and culture, at 12% of the total. The cumulative increase in framework expenditures is estimated at ISK 69bn from the 2022 National Budget until 2027. This is equivalent to a 7% increase at constant 2022 prices.
Strengthening mental health service is a priority issue for the Government, and the fiscal plan provides for an even further increase in allocations to mental health over the horizon. This will make it possible to establish mental health teams at community health centres nationwide, strengthen preventative measures, and provide wide-ranging, multidisciplinary mental health service tailored to users’ diverse needs. A permanent increase in mental health allocations in the amount of ISK 500m is planned for the first year of the fiscal plan, with an increase of ISK 100m per year in the two years to follow.
It is also worth noting that during the term of the fiscal plan, there are plans for increased allocations for a review of the disability portion of the social insurance scheme, with emphasis placed on vocational rehabilitation and various labour market initiatives. Next year, the first step will be taken towards a new, fairer system with an allocation of ISK 430m, which will be used for various projects designed to foster a wider range of employment opportunities for people with reduced ability to work.
Strong economic pillars increase in number
Over the horizon of the fiscal plan, investment in a strong society and support for the ongoing advancement of growing export sectors will continue. Public sector investment will average 3.6% of GDP over the period, including with support for green investment through the tax system and sustained and increased support for research and development. An investment of ISK 90bn in the ongoing construction of the new Landspítali hospital on Hringbraut is planned, in addition to the ISK 24.4bn allocated to the project during the last electoral term.
Export revenues from intellectual property are now estimated at 10% of Iceland’s exports, after doubling since 2014 and increasing by 50% since 2018. Employers in technology, intellectual property, high-tech services, information technology, and telecommunications have increased in number by over 300 in three years’ time and now account for over 18% of all employers in the exchange economy. For comparison, employers in the tourism industry account for 12%.
Iceland now ranks 17th out of 132 countries on the WIPO Global Innovation Index, having risen from 23rd place in four years. This growth in the intellectual property industry comes in addition to improved returns in the fishing and energy-intensive sectors. Furthermore, aquaculture has grown faster than other sectors, with export revenues trebling since 2018.
Bjarni Benediktsson, Minister of Finance and Economic Affairs:
Through moderate spending growth coupled with a public investment initiative, strong support for innovation and R&D, and a favourable environment for the germination of new ideas in our society, we lay the foundation for a new GDP growth phase. On the basis of this fiscal plan, we will move in steadfast steps towards renewed fiscal equilibrium and a low debt-to-GDP ratio.
Priority will be given to controlling inflation and ensuring economic stability, thereby contributing to moderate interest rates for households and businesses. A successful fiscal-monetary-labour market policy mix plays a key role in this endeavour.”