Minister Advocates for Fiscal Restraint in Iceland’s New Budget Skip to content
Photo: Golli: Bjarni Benediktsson.

Minister Advocates for Fiscal Restraint in Iceland’s New Budget

In a budget briefing yesterday, the Finance Minister highlighted increased government earnings while advocating for fiscal restraint to counter inflation. He revealed a multifaceted approach for the upcoming year, which included streamlining state institutions for targeted savings of ISK 17 billion [$129 million / €119 million], revising road taxes to account for the surge in electric vehicles, and adjusting income tax brackets, all against a backdrop of a projected state treasury deficit and rising healthcare costs.

Cautious optimism tempered by financial and demographic challenges

During yesterday’s press conference on the state budget, Finance Minister Bjarni Benediktsson underscored the significance of acknowledging a marked increase in government revenue, which had surpassed earlier projections. He advocated for continued fiscal discipline to mitigate rising inflationary pressures. The goal was to prioritise investments in infrastructure and basic services like the National Hospital and housing. He also revisited plans to streamline state-run institutions, targeting savings of ISK 17 billion [$129 million / €119 million] for next year.

On transportation, Bjarni stressed that the rise in electric vehicles, facilitated by government incentives, had negatively impacted fuel tax revenues. He announced plans for a “new, simpler, fairer, and more transparent system” based on road usage. “It’s time for electric vehicles to participate in maintaining the road network,” he added.

As noted by RÚV, the draft budget reveals a projected state treasury deficit of ISK 46 billion [$344 million / €320 million], primarily due to interest expenses outpacing interest income. However, core operational revenues anticipate a surplus of ISK 28 billion [$209 million / €195 million]. Self-sustaining state entities project a modest surplus in core operations but face a deficit once interest is considered.

Healthcare spending is set to increase significantly, up by ISK 88 billion [$658 million / €612 million] since 2017 and ISK 14 billion [$105 million / €97 million] compared to last year. Factors like tourism, population growth, and an ageing population are cited as key drivers.

An 8.5% adjustment in income tax brackets by year’s end is expected to reduce the average income tax by about ISK 7,000 [$52 / €49]. Bjarni also noted the reimplementation of the overnight stay tax in 2024 – revoked in 2020 due to the pandemic – extending it to cruise ships.

Total state expenditure for the next year is estimated at ISK 1,480 billion [$11 billion / €10.3 billion]. The budget draft shows a 22.3% increase in financial costs and a 14.8% rise in hospital services. Funding for innovation has decreased the most, by 9.7%, followed by a similar reduction in foreign affairs.

Overall, the budget suggests a cautious optimism tempered by financial and demographic challenges.

Briefly on the budget: According to constitutional provisions, disbursements from the state treasury can only be made if authorised in the annual budget or a supplementary spending bill. The budget undergoes a rigorous legislative process: the Minister of Finance introduces the draft budget to Parliament during its first autumn session, typically held on the second Tuesday in September. Following this, the draft undergoes three rounds of parliamentary debates before it is usually finalized and approved in December.

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