In a press conference yesterday, the government introduced its strategy to address inflation. The proposed plan involves a combination of spending cuts and tax increases. The government believes that these measures will enhance the performance of the state treasury, projecting a positive impact of over ISK 36 billion ($255 million / €239 million) in the upcoming year.
Consensus to reduce the salary increases of senior officials
Prime Minister Katrín Jakobsdóttir, speaking to RÚV, stated that the government had reached a consensus to curtail salary increases for senior officials. This decision, set to take effect at the end of the following month, is intended as a clear message to address the issue of inflation.
“This sends a clear message. While I believe that our current fiscal policy, as it stands before parliament, already conveys a message, we are now refining it to incorporate the feedback received.”
To safeguard the purchasing power of pensioners and individuals with disabilities, social security pensions will witness a 2.5% increment starting mid-year. This increase will be in addition to the initial raise implemented at the beginning of this year, RÚV notes.
Furthermore, the government plans to raise the income threshold for housing benefits by 2.5% for the ongoing year, with retroactive implementation from January 1.
“This serves as a clear message aimed at supporting the objective of curbing inflation. The precise timing of its impact remains uncertain, yet it is a measure that is likely to take effect in the near future,” Prime Minister Katrín emphasised.
Construction projects to be postponed
To curb inflation, construction projects exceeding ISK 3.5 billion ($25 million / €23 million) will be temporarily delayed. Notable among these projects is the construction of a new government office building and an emergency response coordination centre.
In a statement on the government’s website, it was also revealed that efforts are underway to amend housing market laws, aiming to enhance tenant rights. Additionally, the government will explore modifications to regulations pertaining to homestays in order to level the competitive landscape and alleviate housing market pressures.
Increased taxation on tourism
Finance Minister Bjarni Benediktsson maintained that the government’s measures would prove effective in curbing inflation and assisting individuals facing financial difficulties. He noted that the implementation of cost reductions and savings amounting to ISK 9 billion ($64 million / €60 million) in the public sector was yet to take place next year. The proposed tax increases were, however, apparent.
“First and foremost, we are announcing a 1% additional income tax for legal entities next year,” Bjarni commented. Concurrently, there will be reductions in housing renovation and new construction refunds. “We also have plans to increase taxation within the tourism sector, which includes a new levy on cruise ships. It is likely that the overnight stay fee will be reintroduced. Additionally, the alternate airport fee (i.e. varaflugvallagjald), has been introduced. These measures primarily impact the tourism industry,” Bjarni noted.
Accommodating those at the bottom
Bjarni added that the government would try to accommodate tenants and people who receive payments from the social security system. “In the middle of this year, we are increasing the social security benefits by 2.5% and likewise increasing the curtailment limits in the housing benefit system. So we are doing a lot to protect the position of those at the bottom of the income ladder, and the figures we have from the levies for 2022 show that these measures have worked and will continue to do so,” Bjarni remarked.