Stability Pact Signed in Iceland Skip to content

Stability Pact Signed in Iceland

The Icelandic Confederation of Labor (ASÍ), the Confederation of Icelandic Employers (SA), the government and local authorities signed a stability pact for Iceland after intensive negotiations yesterday.

Prime Minister Jóhanna Sigurdardóttir. Photo by Geir Ólafsson.

Approximately 150,000 wage earners stand behind the pact, the vast majority of workers; according to the Directorate of Labor, there is a total of 168,000 people on the employment market in Iceland, Fréttabladid and Morgunbladid report.

The pact is in 14 parts and is valid until the end of 2010. Among other items, it assumes that the reorganization of the banking system be completed by November 1 this year, that currency restrictions be abolished and that the policy rate be lowered.

Prime Minister Jóhanna Sigurdardóttir said it is to be expected that the Icelandic economy will live with a weak currency and a high policy rate for some time. “There is only one answer to that: to apply for membership to the European Union.”

Sigurdardóttir added that the government’s actions this summer will be aimed towards creating conditions for further lowering the policy rate. A strategy to that end is to be ready on August 1.

“The projects ahead are extensive, and it is impossible to avoid increasing the income tax and indirect taxes also next year,” Minister of Finance Steingrímur J. Sigfússon told Morgunbladid.

“However, the framework has to be clear and well prepared so that it is possible to react to circumstances when decisions on individual items, be it cuts to expenses or increased taxes, are executed,” the minister added.

According to the pact, increased taxes will not account for more than 45 percent of the actions undertaken to repair the state budget deficit.

The plan is for higher taxes to deliver ISK 58 billion (USD 450 million, EUR 323 million), while ISK 70 billion (USD 544 million, EUR 390 million) is to be saved with reorganization and cutbacks.

According to the pact the lowest salaries will increase by a monthly sum of ISK 13,500 (USD 105, EUR 75), which was supposed to take effect on March 1 this year but postponed due to circumstances in society. It will now be introduced in stages and take full effect by November 1, reports.

Thórarinn V. Thórarinsson, who served as the managing director of the Employer Union when the national reconciliation was made in 1991—with which yesterday’s stability pact has often been compared—told Fréttabladid that he considers it strange that an agreement was made to increase salaries during such difficult times.

Thórarinsson said he believes that the pay raises must have been the price that the government had to pay in order to secure peace on the employment market. He added that the biggest risk regarding the stability pact is the position of the pension funds.

According to the pact, matters concerning the pension funds will be reviewed. “It will prove a difficult project to defend the position of the pension funds and the future of the system,” Thórarinsson commented.

However, Ari Skúlason, who served as the director of the economics division of ASÍ when the national reconciliation was reached in 1991, said he sees few danger signals in the stability pact, hoping that it is the first positive step out of many.

Thorgerdur Katrín Gunnarsdóttir, vice-chair of the Independence Party, described the stability pact as an important milestone, however adding that the state authority is being spared from rationalization. “Such extensive tax increases are likely to slow down the economic stimulus,” she commented.

Click here to read more about the stability pact.

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