The Icelandic state will have to spend about 40 percent of its income on payments of loans according to the budget plan of the finance ministry, reports Morgunbladid. Data about the repayment schedule of foreign loans which the Central Bank of Iceland revealed to the Trade committee of Althingi recently combined with domestic debt repayments show that repayment of loans will weigh heavily in the state’s expenditure in forthcoming years.
In 2011 the repayment of debts will amount to 60 percent of the state’s income. The state expects a two percent increase in income from the year before, according to the budget plan of the finance ministry.
Jón Daníelsson, docent in finance at the London School of Economics claims that the debt of the Icelandic state is one of the highest in the world.
“I would say that this is nearing or even over the capacity limits, like it is presented. The government needs to cut much more of the state budget if they are going to meet this. Increased taxation is not enough to solve the problem because high taxes do not encourage people to work more. There are plenty of examples to prove that,” said Daníelsson to Morgunbladid.
He claims that the government has failed at producing a decent budget. The expenditure is like in 2007 when the economy was booming but the income like 2008 after the economic crash.
“The state seems not to realize the gravity of the problem and has not prioritized its expenditure well enough,” said Daníelsson. “The debt of the state is the highest in the world at the same time when the economy is in a great slump.”
Daníelsson said that the government was handing out grants to all sorts of strange parties and named the Friends of Monsters Society as one example. “The government has not made it clear to the nation how much we need to cut services in the next five years. The sooner it starts cutting down the state budget the better,” he said.
The debt of Greece has been talked about a lot recently but Greece owes 113 percent of GDP and is in intensive care in the EU.
“When you look at how far Iceland is from reaching the criteria of the EU regarding foreign debt it is highly unlikely that we will get the Euro in near future. The EU must regard the debt situation of the Icelandic state as very serious in the negotiations with Iceland that will start soon,” said Daníelsson.