March 15 2000
Recently concluded wage agreements and
their implications for Central Government finances
1. The wage agreements
On March 10 a number of unions, representing about 30 per cent of all employees in the Federation of Labour, concluded three-year wage agreements with the Employers' Confederation. The unions represented mostly unskilled workers in the area of Reykjavík and vicinity. Labour unions in other parts of the country are in the process of negotiating their new contracts. It is viewed as certain that the recently concluded wage agreement will set a benchmark for all following agreements that come up for negotiation in the next weeks and months.
The wage agreements provide a 3.9 per cent increase in all basic wages as of March 1 2000, 3 per cent on January 1 2001 and January 1 2002, respectively, and 2.25 per cent on January 1 2003, a total of 12.7 per cent over the 3S years contract period until September 2003. Special increases are granted to the lowest-paid workers; their wages will rise by 30 per cent over the contract period.
2. Government facilitation of the wage negotiations
In order to facilitate the conclusion of the wage agreements, the Government declared that the personal income tax credit and social security payments would rise in line with the stipulated wage increases throughout the contract period instead of price increases as previously. According to this, the personal income tax credit, now 23,912 krónur a month for each individual, will be increased by 2.5 per cent on April 1 2000 (they were already increased by 2.5 per cent on January 1), 3 per cent on January 1 2001 and 2002, respectively, and 2.25 per cent on January 1 2003. Furthermore, the means-tested element of child allowances will be reduced so that child allowances will increase by about one-third over the contract period. Third, social security benefits will increase by 0.9 per cent on April 1 (they were already increased by 3.6 per cent on January 1) and thereafter by the same percentage as stipulated wages throughout the contract period. Fourth, the Government promises to lengthen childbirth leave and equalise leave rights of parents. (For a full text of the Government's statement, see below.).
3. Fiscal implications of the Government's measures
The Ministry of Finance estimates that the increase in the personal income tax credit will reduce Treasury revenue by about 900 million krónur this year and by 1,200 million krónur on a full-year basis, equivalent to a 0.4 per cent increase in disposable household income. The impact in 2001-2003 will be marginal since the agreed wage increases will broadly be in concert with expected inflation over the contract period.
The increase in child allowances is expected to cost 400-500 million krónur each year, i.e. 1,200-1,500 million for the contract period as a whole. The increase in other social security benefits in excess of fiscal budget assumptions is marginal. The implementation of changes in the childbirth leave is still under consideration and will enter into the drafting of the 2001 budget.
March 10 2000
connection with wage agreements in
the course of the year 2000
The Government's Policy Statement places primary emphasis on ensuring economic stability and creating conditions for continued economic growth, since stable prices and a strong competitive position of the Icelandic economy a precondition for the creation of new jobs. All monetary, exchange rate and fiscal policy measures have in recent months been in accordance with this aim.
The Government will continue to adhere to this policy. It is of utmost importance that inflation abates in the near future so that the basis of purchasing power remains sound. This will be the Government's guiding aim in decisions on economic policy since it will be the basis of wage agreements in the country, also for the public sector.
1. Basic personal income tax credit will be in concert with wage developments
In order to facilitate the conclusion of wage agreements in 2000 and thereby contribute to increase economic stability over the next several years, the Government commits itself to increase the personal income tax credit in concert with stipulated wage increases during the contract period. The increase in 2000 will however be slightly higher. The personal income tax credit will increase by 2.5 per cent as of April 1 2000. This increase will be in addition to the 2.5 per cent increase on January 1, so that the total increase for the year 2000 will be 5 per cent. Furthermore, the personal income tax credit will increase by 3 per cent on January 1 2001, a further 3 per cent on January 1 2002 and by 2.25 per cent on January 1 2003.
2. The means-tested element of child allowances will be reduced and the income threshold increased
In accordance with the Government's Policy Statement, the child allowance arrangement will be reviewed with the aim of reducing its linkage to income and raising the income threshold where child allowances begin to be cut. This measure will be implemented in three stages, in 2001, 2002 and 2003, and will increase child allowances by about one-third from their present level.
3. Social security benefits increase in concert with wages
The Government will ensure that social security benefits increase in concert with agreed wage increases over the contract period. The increase in 2000 will however be slightly higher. These benefits increased by 3.6 per cent on January 1 and the Government will see to a further increase on April 1 so that the total increase of benefits in 2000 will be 4.5 per cent. These benefits will increase further by 3 per cent on January 1 2001, by 3 per cent on January 1 2002 and 2.25 per cent on January 1 2003.
4. Lengthening of the childbirth leave, equalisation and coordination of leave rights
The Government will prepare change in regulations on childbirth leave with the aim of lengthening the childbirth leave, equalising the leave rights of parents and coordinating leave rights.
5. A review of the income tax system
Over the next several months the Government will conduct a special review of the personal income tax system and the PAYE system. The advantages and disadvantages of increasing the number of tax rates will be reviewed. Unions and employers will be consulted in the course of this review.