- Due to a lower debt level and sustained fiscal surpluses in recent years, the domestic economy is well prepared to face temporary headwinds.
- Performance targets are scaled downwards to adapt to the economic contraction.
- Measures are taken to ensure a positive overall balance for the general government.
- Fiscal rules are honored.
- Emphasis is placed on applying fiscal policy to offset declining GDP growth.
- The overall balance is expected to improve as GDP growth picks up again.
The Minister of Finance and Economic Affairs has submitted to Parliament a resolution on a revised Fiscal Policy Statement for 2018-2022. The revised policy targets entail a reduction in the planned general government surplus, in view of the changed economic outlook as portrayed in recent macroeconomic forecasts — an outlook that represents a substantial change in the assumptions underlying the current fiscal strategy. With the change in outlook, it can be assumed that Treasury revenues will contract markedly and that the outcome could deteriorate by as much as ISK 35bn per year in 2019 and 2020, excluding all mitigating measures. As a result, the Government will recommend to the Parliamentary Budget Committee that the fiscal strategy plan be revised to include measures guaranteeing a balanced budget.
Economy highly resilient
Economic reforms put in place by the authorities in recent years have prepared the economy to face temporary headwinds. Among these reforms are the reconstruction of the financial system on a sound footing, the cancellation of customs duties and excise taxes, and the reduction in the payroll tax. In addition to these are extensive Government measures aimed at facilitating successful wage settlements: for example, significant tax cuts — particularly for those with below-average wages — strong support for families with children, and multi-faceted measures in response to problems in the housing market.
These policy actions bolster economic stability even further. Households’ and businesses’ debt and equity position is much stronger than in the last economic downswing, and the substantial reduction in Treasury debt has enhanced the resilience of the economy. The public sector is therefore in a good position to support the economy as it gathers momentum for a new growth phase.
A fiscal surplus is the goal
The current fiscal statement assumes an overall fiscal surplus of 1.4% in 2018 and 1% per year, on average, in 2019-2022. The proposed revised strategy takes account of the changed outlook from 2019 onwards, yet it provides for a positive overall balance over the horizon of the strategy. The overall balance will be required to be above -0.4% of GDP in both 2019 and 2020, -0.3% in 2021, and in balance in 2022. For precautionary reasons, the revised policy grants a scope for up to 0.4% of GDP in 2019-2022 vis-à-vis the targets for the overall balance to be set in annual five-year fiscal strategy plans. In other words, it is the Government’s intention that the targets in the fiscal strategy plans will provide outcomes that will be more favorable by at least this margin.
If economic developments and the assumptions underlying the projections turn out worse than is currently assumed, it will be permissible to use that margin to adjust the fiscal outcome to the same degree. Apart from that, it is assumed that the authorities will take appropriate action, if need be, so as to ensure that the outcome in the fiscal strategy plan and the fiscal budget will be over and above the margin for uncertainty provided in the fiscal policy statement.
In other words, this means that even though changed economic forecasts inevitably lead to more modest performance targets in coming years, and even though the revised fiscal policy provides some scope, the Government aims to ensure continued deficit-free operations.
Revision in compliance with fiscal rules
The revised fiscal policy statement is consistent with the numerical fiscal rules prescribed in the Act on Public Finances as requirements for both the fiscal policy statement and the fiscal strategy plan. The overall balance should neither become poorer than -2.5% of GDP in a single year, nor be negative over the five-year period. Therefore, the proposed Parliamentary resolution does not recommend a temporary suspension of the fiscal rules in the Act on Public Finances, even though the Act allows for it when the fiscal policy statement needs to be revised due to a major alteration in its premises.