Hoppa yfir valmynd
Ministry for Foreign Affairs

At the end of the year


At the end of the year


At this turning point we look back and try to some extent to settle accounts for the past year. But there are no universal accounting principles to rely on and our books are kept along highly personal lines. Not all the details have necessarily come to light by New Year’s Eve. Many receipts and records will certainly never turn up. I foresaw few of things that would happen to me during the year when it began, neither on the personal nor political calendar. However, it was clear that I would leave the office of Prime Minister on a specific day, after quite a long stay there, and all that went according to plan. This is not an appropriate forum for discussing the goings-on that affected me personally last year. They had their ups and downs, as is always the case with all of us.


After the general election in 2003, which was fiercely fought and various devices were used beyond the usual ones, the outcome was that the coalition parties retained their majority – although slightly reduced – and wanted to continue their partnership in government. This was not a foregone conclusion, but definitely the most favourable outcome. Many people found it strange that decisions about the leadership of the Government and other reshuffles should be made more than a year in advance, since this had never been done before. Of course this approach reflected above all the strong trust that prevails between the leadership of the coalition parties.


The Independence Party had not held the Ministry for Foreign Affairs since 1987, although it is hardly disputed that the party has had a major influence upon the foreign policy that has been pursued ever since it was returned to Iceland’s own jurisdiction more than sixty years ago. It should also be borne in mind that the main planks of foreign policy are not the business of the Foreign Minister alone but to some extent that of the cabinet itself, so it is an effective arrangement for the Foreign Minister and Prime Minister to be in close consultation on these issues at any given time. The Icelandic Government decided in March 2003 to declare its support for the policy of vigorously enforcing United Nations resolutions on Iraq. This entailed that, if the tyrant Saddam Hussein would not comply, the much-repeated threat of using military force would be followed through. Participation in the Coalition of the Willing involved a political declaration accompanied by no other obligations at that stage. Those political declarations were made by the proper bodies and were completely consistent with the repeated statements by leaders of the coalition parties, that the use of force in Iraq could not be ruled out.


Iceland is in a unique position with respect to military action, as other nations are aware. The Icelandic authorities cannot send anyone to a region where hostilities rage if he does not want to go there himself. The political declarations with regard to Iraq could never imply that Iceland was a “participant in a war,” as endless gurus are repeating after each other at the moment. Criticism has been levelled at the lack of a documented agreement in the cabinet minutes. This is based on a misunderstanding. The Government is not a multipartite authority. A decision of this kind rests with the Minister for Foreign Affairs, with the support of the Prime Minister when appropriate. The decision was not disputed in the ranks of the cabinet. The political policy was decided and announced many weeks before the last election. Of course it was publicly debated. Claims by opposition spokesmen that these discussions were insufficient discredit no one but them. Plenty of nonsense has been talked in this debate, as is commonplace in Iceland. Most recently a number of individuals, who modestly call themselves the “National Movement”, have decided to raise funds to place an advertisement in a newspaper in New York. They apparently feel that the world believes they were personally behind the war in Iraq. Admittedly I have never heard about that misunderstanding anywhere on my travels, but if those people feel that it exists and can be rectified with a single newspaper advertisement on the other side of the Atlantic, there is certainly no need to object to that.

Democracy is certainly experiencing difficult labour pains in Iraq and the problem is exacerbated because the global community did not have the foresight to show solidarity on action at the outset. However, it was very noteworthy and, indeed, gratifying to witness the growing solidarity on future actions in Iraq at the last summit of NATO Foreign Ministers, and that all the foreign ministers attending it declared that their countries would take positive action in the interests of peace and reconstruction in Iraq. It would never have occurred to any of the leaders to propose that the coalition forces should be withdrawn at the first instance.




As is well known, the position of Iceland’s defences has been uncertain for some while. Uncertainty and security make a bad combination. Following my excellent meetings during the year with President George W. Bush and Secretary of State Colin Powell, talks are now pending between Iceland and the US on the future of our defence cooperation. At the request of the US President these will address increased participation by Iceland in the cost of operation and maintenance at Keflavík Airport. The Icelandic authorities are ready to do this, since civilian traffic at the airport has grown substantially while military flights have decreased. I consider that there is a genuine will at the highest levels in Washington to continue the defence cooperation and ensure minimum defence forces in Iceland for that purpose. However, the matter has not yet been resolved and air defences remain, as before, a precondition on the part of Iceland for the defence agreement to have any significance and value. Underlying this demand are the same obvious reasons as those for air defences in all our neighbouring countries.


In global security issues, the Middle East has been in the spotlight this year as often before. A major event there was the death of Yasser Arafat. It was generally felt that Arafat’s death had created an opportunity at last for moving the Israeli-Palestinian peace talks forward. Whether that window can be used or not depends on whether the new Palestinian leadership makes the necessary reforms and turns openly and actively against terrorism. That is the precondition for enabling real peace talks to begin. The Icelandic Government firmly supports an independent Palestinian state, but a fundamental and inviolable principle is that the security of Israel will be secured.


The Icelandic Government wholeheartedly supports the hopes of the great majority of Iraqis that freedom and democracy can be consolidated, and the military action that is and was a necessary precondition for this. Terrorist acts in Iraq appear to be directed in particular against those hopes and in fact against the cause of freedom and human rights in that part of the world. The conflict in Iraq is also part of a larger war to fight evil forces of the kind that bared their claws with the attacks on the US on September 11, 2001 and are responsible for many other murderous attacks on innocent people. There is no reason to presume that such characters would flinch from deploying weapons of mass destruction if they acquired them. That risk creates a shared destiny for Iceland with our friends now, just as when the destructive forces of fascism and communism were tackled in the last century.




There is no question that 2004 was a favourable year for Iceland in economic terms. Economic growth exceeded expectations and disposable income continue to increase, for the ninth consecutive year. Iceland’s economy is now more diversified than ever and it was welcome that international ratings agencies affirmed during the year that Iceland belongs in the top bracket of the countries that are rated highest in international credit markets.


We Icelanders now have a unique opportunity for expansion. For almost a decade the economy has grown enormously in scale and capability, and forecasts now indicate that a new growth phase has begun. Annual GDP growth is expected to be 5% or more over the next three years and afterwards roughly 2½% until 2010. Our GDP will exceed 1,000 billion krónur in 2006, which measured in terms of dollars per capita clearly means that Iceland will gradually move farther up among the group of nations with the highest living standards in the world. Sizeable tax cuts have been made, Treasury debt has been retired on a large scale, expenditure on health and social affairs has been stepped up substantially and – which is the envy of many developed nations – Iceland’s pension fund system is on a strong footing. Expenditure on education and science has been increased and the Government recently decided to double allocations to public science funds during its term of office. Liberalisation of banking has unleashed a tremendous force, unemployment is low, the transferable quota system has created long-awaited stability in fisheries and Icelandic businesses are making rapid inroads in international markets. The position of the Icelandic economy has gained considerable attention. So it is no surprise that our main tasks at present are problems connected with a boom. The main task of the Icelandic Government involves preventing too rapid growth. Our main trading partners in Europe face different tasks. Sluggish economic growth, falling birth rates and pending tax increases, partly due to unfunded pension liabilities, are top of the agenda for most governments within the EU. Some time ago it was announced that unemployment among young people in the EU averaged 20%, and only 40% of Europeans aged 55 to 65 had jobs. Such a waste of human resources is terrible and must be a cause of anxiety in the EU. But although we are prospering at the moment there is no reason to act as if it is all plain sailing. Household debt has increased and there is every reason to use growing disposable income to repay it, thereby creating a permanent increase in assets. Of course it is understandable that debt accumulation should increase when all the credit institutions’ floodgates are opened at once. But it should not be taken for granted that we ought to take advantage of every possible loan on offer. The day of reckoning eventually comes around – that arrangement has not changed. In this respect, like so many others, moderation is by far the most favourable course. The strengthening of the Icelandic króna has tempted many people to take loans denominated in foreign currency. It needs to be borne in mind that the main reason for the strong króna now is heavy investment in power plants and aluminium smelters. Eventually the exchange rate of the króna will reflect the state of the real Icelandic economy, the production capacity of industry. When the impact of the investments wanes, the exchange rate of the króna will readjust. Experience of wild betting with foreign currency ought to be fresh in the minds of all of us. Freedom is accompanied by responsibility.


The Independence Party has always campaigned for introducing competition in as many fields of the economy as possible. A gratifying amount of progress has been made on this task in recent years. Competition legislation is under ongoing review and the most significant factor is that the state has withdrawn from operating a wide range of businesses, spearheaded by the privatisation of the state-owned banks. Stability, low taxes, clear and straightforward rules and norms, easy access to capital: all these factors contribute towards healthy competition. Member of parliament and clergyman Arnljótur Ólafsson understood the importance of competition well. In his book The Science of Wealth he wrote that “Competition itself is nothing more than the freedom of man, it is freedom of choice, freedom of work and enterprise, freedom in business, the freedom to lend and sell, to rent and buy.” Behind the campaign for competition lies the actual demand for human freedom. More than a century has passed since the Reverend Arnljótur Ólafsson wrote his book, but his message is still fully valid. In recent times the leaders of the Government have firmly underlined that competition should be for the benefit of all. Competition is a permanent state, it does not end with a handful of people gaining a stranglehold on individual markets. Competition makes stringent demands, it takes time and is by nature infinite. Everyone knows that businessmen around the world see benefits and convenience for themselves in restricting competition as far as they can. I am not mentioning this to pass judgement on anyone. This temptation is inherent in human nature. How does anyone think that the most admired footballers, full of true sporting spirit, would behave if there were not referees or linesmen in their games, not to mention if they could decide which players were in their opponents’ team, and so forth? Iceland is a small economy, which imposes a strong duty on the authorities to try to promote active competition. If competition comes to an end, so does freedom. Plans have now been drawn up for reorganising the competition authorities. But supervision and regulation can only be of limited use. Referees should not decide the way a game of football progresses, but equally Iceland’s business leaders themselves should create the right atmosphere around them and display responsibility in their work. Good business ethics and integrity are many times more important that all the official regulators rolled into one.




In the run-up to the last general election, both the Independence Party and the Progressive Party promised handsome tax cuts for the forthcoming term of office. During its spring session, Parliament agreed to reduce and harmonise inheritance tax. It has been decided to abolish the special tax surcharge on high incomes, which the Independence Party and Social Democrats [in coalition 1991-1995] had promised was only temporary. The autumn session of Parliament agreed to cut personal income tax by four percentage points and abolish the wealth tax. In its policy agreement the coalition also affirms its willingness to reduce value-added tax on necessities. These reductions follow in the wake of other tax cuts in recent years. It is crucial that, at the same time as taxes are cut, Treasury debt is being reduced and expenditure in major policy areas such as education and health continues to grow. These tax cuts are a great boost for Icelandic households and lay the foundation for handsome growth in real disposable income in the years to come. Low taxes on individuals and businesses are a precondition for a dynamic economy and flourishing society. The smaller the share that the public sector takes from what we earn, the more freedom we have to dispose of it as suits us best. A society based on low taxes but a solid welfare system is more robust, diverse and sustainable than one based on high taxation. While civil servants are upright and conscientious people –every one of them – they are not necessarily the best judges of what our earnings are spent on, over and above what is necessary. It was instructive to follow the arguments put forward by leftists in the debates on the tax cuts. The Left-Greens, true to form, do not want any tax cuts at all. But the Social Democratic Alliance ran back and forth as usual and it took considerable concentration to keep track of their ever-changing arguments. Very little of what emerged calls for in-depth debate. It has been claimed that lowering taxes in the current climate is imprudent, because of the booming economy. The answer to that is that it is difficult to see a more favourable time for lowering taxes if not when the Treasury is well place and its revenues exceed its expenditures. Is it credible that taxes will be lowered when the Treasury is running a deficit? The potential expansionary impact of the tax cuts must be assessed against the size of the Icelandic economy. The reductions that have now been approved will amount to just over 20 billion krónur annually when they have been fully implemented. GNP then will be more than 1,000 billion krónur. We can also assume that the public will use part of the tax cuts to pay off their debt. Lowering taxes now is therefore no threat to economic stability in Iceland. To counteract expansionary trends, the Government has set a long-term target for Treasury spending, aiming to confine its growth in real terms to within 2% over the next few years. If this holds good, the state will reduce its level of activity in the economy and thereby counter undesirable expansionary pressures.


When Icelanders went to the polls in 2003 they could trust the Independence Party to deliver its promises to reduce taxes during the coming term of office, if it was in a position to do so. However, there was one dark cloud: leftists are in control of Reykjavík City Council. In the teeth of their own promises, they have now seized the opportunity to rob people in the capital of the gains represented by lower income tax. The rise in municipal income tax in the capital confirms that the [leftist] Reykjavík List council has run aground. Reykjavík once had a low level of debt but by virtue of its size and reliable rule by the Independence Party could offer its citizens good services and a low municipal income tax rate. Now the city’s debts have grown alarmingly, yet its taxes and charges have increased substantially as well. Reykjavík, which was once on of the leaders, now ranks with the municipal authorities that offer their citizens with the poorest terms. The Reykjavík List has given up trying to run the city. It should step down.


More than nine hundred years have now passed since Bishop Gissur Ísleifsson had the tithe made law in Iceland. It was said that the tax was established because of the love that Icelanders felt towards the bishop, although it is unlikely that everyone who had to pay it was asked. The tithe was a wealth tax and we Icelanders have paid such taxes ever since the year 1096. A notable turning point in our history has therefore been reached today, with the abolition of the wealth tax on private individuals and businesses. Although the wealth tax is old, it will hardly be missed. It is an inherently unjust tax, tending to hit those hardest who least deserve it. Its removal is a major benefit for senior citizens, many of who during their long lives have acquired housing on which they owe little, but previously needed to pay a special tax on their own prudence and saving. The Independence Party has long campaigned for a reduction in the wealth tax. For a long time no one dared to hope that it would be abolished. This has now been done by law. We need to pay wealth tax one more time, for the year that comes to an end today, and then never again.




A wide range of cooperation now takes place at international level, since there are many problems and threats that are not confined by restrictions such as national borders. Such cooperation sometimes significantly reduces individual countries’ chances of arranging matters as they prefer. It is not necessarily certain that this is always a good thing. We can be sure that international cooperation greatly diminishes democratic influences; at least, decisions are made increasingly farther from the roots of democracy. Major decisions are now frequently made at leaders’ summits of various sorts. The path for such decisions is not prepared in national assemblies, even though most leaders derive their power from them. Matters are first sent to parliaments after the summits as a fait accompli which they are unable to change, since this would disrupt international cooperation. This development must entail a major problem for democracy, which sooner or later will need to be addressed.




The catastrophes that followed the earthquakes in Asia are overwhelming and appalling. Admittedly, man himself has caused greater fatalities, as recent examples from Africa show. Indeed it is worth pondering why the global community is more nonchalant about news of catastrophes from that continent than about what happens elsewhere. But it is the mighty force of immediate destruction that is so striking about the recent events in Asia. Man has never been more active and powerful on the planet than now. Yet all his might and technology are of no avail when nature makes its full force felt. Nonetheless, we must welcome the growing worldwide sense of compassion and help for others in their suffering, so that the plight of victims can be eased. Iceland, as always, will make its contribution in this respect.

I thank my fellow-Icelanders for the work and company we have shared over the past year and wish the people of Iceland good fortune and blessings in the New Year.


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