Hoppa yfir valmynd
Ministry of Finance and Economic Affairs

National Budget proposal 2016 

  • Balanced budget for the third consecutive year
  • Import duties revoked; personal income tax reduced
  • Old-age and disability pensions increased
  • Allocations to housing affairs increased
  • Treasury debt ratio reduced
  • Social welfare system and healthcare strengthened
  • Increased allocations to innovation and development
  • Improved economic outlook with capital account liberalisation strategy

The National Budget proposal for 2016 has been submitted to Parliament. The proposal provides for a surplus of ISK 15.3bn, for the third consecutive year with a balanced budget. The primary surplus will continue to be significant, at ISK 73bn, which is larger than in most other countries at present.

Real wages have risen rapidly, with low inflation, rising wages, write-downs of indexed mortgage debt, and reductions of taxes and fees. This policy will continue. Cancellation of import duties, reductions in individuals' income tax, and reduction of debt plus a growing operating surplus are the most salient features of the budget proposal. Also assumed is a new ISK 2.6 bn allocation to housing affairs and reduced taxation of rental income in order to encourage long-term renting. Budgetary allocations to healthcare, education, and social security will increase.

Cancellation of import duties

Changes in the tax system in 2016 aim at improving living standards in Iceland still further, while simultaneously enhancing the efficiency of the system. The main changes centre on individuals' income tax and the cancellation of import duties on clothing and footwear. The aim is to revoke duties on clothing and footwear at the end of the current year. It is also planned that all duties other than those imposed on specified foods be cancelled as of 1 January 2017.

Cancellation of import duties will have a strong impact on retail prices and could lower the consumer price index (CPI) by as much as 0.5% in 2016 and up to 1% in 2017. Although households' disposable income will increase as a result, the measure is also intended to improve the competitive position of retail trade in Iceland. In all, direct mark-ups imposed by the State on imported goods will decline by ISK 4.4bn.

    Retail price¹ incl. VAT, in ISK  
Product² Import duty Now After change Reduction %
Sweater....................................................... 15% 4,929 4,286 -643 -13.0
Child's parka................................................. 15% 10,590 9,209 -1,381 -13.0
Athletic clothing........................................ 15% 11,980 10,417 -1,563 -13.0
Football socks........................................... 15% 1,990 1,730 -260 -13.0
Rain boots............................................ 15% 10,849 9,434 -1,415 -13.0
Rain jacket and pants................................................... 15% 10,500 9,130 -1,370 -13.0
Snowsuit.................................................... 15% 25,000 21,739 -3,261 -13.0
Cold-weather shoes................................................. 15% 14,624 12,717 -1,907 -13.0
Total ....................................................   90,462 78,663 -11,799 -13.0

¹For simplification, it is assumed that the wholesale and retail profit margin is the same for all types, or 75%.
²Assuming that the goods in question are imported from a country without a free trade agreement with Iceland.

Income tax reduction – increase in benefits

Individuals' personal income tax will decline in two stages, the latter of which will reduce the number of tax brackets from three to two. The tax rate in the lower tax bracket will decline from 22.86% to 22.68% on January 1st 2016 and to 22.50% at the beginning of 2017. The additional tax charged in the middle tax bracket will be reduced by half as of the beginning of 2016, and that bracket will align with the bottom tax bracket at the beginning of 2017.

Child benefit payments will continue to increase, with the budget proposal providing for a 3% increase in benefit amounts. Old-age and disability pension benefits and unemployment benefits will rise 9.4%.

In order to encourage long-term rentals, it is proposed that the tax-free threshold for individuals' income from residential property rental be raised from 30% to 50%. The effective tax burden on rental income will thereby decline from 14% to 10%.

Overall and primary Treasury balance

In ISK billions, current prices
Accounts 
2014
Budget 
2015
Estimate 
2015
Proposal 
2016
Revenues 685.5 653.7 680.1 696.3
Expenditures............................................................ 642.5 650.1 659.0 681.0
Overall balance........................................... 43.0 3.6 21.1 15.3
Overall balance, share of GDP (%) ..... 2.2 0.2 1.0 0.7
Primary revenue............................................... 667.4 635.5 662.6 679.7
Primary expenditures.................................................... 563.9 567.6 582.2 606.6
Primary balance.............................................. 103.5 67.9 80.4 73.1
Primary balance, share of GDP (%) ........ 5.2 3.1 3.7 3.1

Improved debt position – lower interest expense

The ratio of Treasury debt to GDP has fallen rapidly in recent years. The debt trajectory has been even more favourable than according to the estimates prepared this spring. Nominal debt is estimated to decline by about 15% during the period instead of the previously estimated 10%, and gross debt as a share of GDP is projected to decline by 21% instead of the previous 18%.

The debt ratio is projected to decline from the year-end 2011 peak of 85% of GDP to 62% by end-2015 and about 50% by end-2016. Treasury interest expense will decline by roughly ISK 8.1bn in 2016, based on the current National Budget. The greatest difference is due to the repayment of the bond used to recapitalise the Central Bank of Iceland after the crisis.

Furthermore, it is clear that the capital account liberalisation strategy provides for the option of substantially reducing Treasury debt and other obligations in the near future. The liberalisation strategy has already contributed to improved sovereign credit ratings, thereby improving Iceland's interest terms in the capital markets.

Miscellaneous budgetary allocations

No restraint measures are made in social security, unemployment insurance, education and healthcare.

Allocations to healthcare functions will increase by ISK 1.6 bn, including strengthening the operational foundations of hospitals and healthcare institutions, as well as increased allocations to healthcare centres and to the action plan for the construction of new nursing homes. The proposal also provides for allocations to complete the design of the Landspítali – University Hospital treatment centre and to build a patient hotel.

Innovation and science are supported with substantially increased budgetary allocations. The increase totals ISK 2bn in 2016, on the basis of the Science and Technology Policy Council policy for 2014-2016. Allocations for continuing and vocational education are increased, and new allocations are planned for a campaign to bolster children's reading proficiency.

Over the next five years, support will be given to the project Iceland – a Country of Food, and a campaign will be launched to promote forestation and land reclamation.

Special allocations will be made to the establishment of a District Prosecutor's Office, with the aim of strengthening the prosecuting authorities in Iceland and expediting case handling. 

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