Government Unveils ISK 17 Billion Cost-Saving Strategy

Minister of Finance Bjarni Benediktsson

State-run institutions are poised to streamline operations through staff reductions and various optimizations, aiming to save approximately ISK 17 billion ($129 million / €119 million) next year, according to the latest fiscal strategies disclosed by the Minister of Finance in a press briefing last week. The Chair of the Centre Party maintains that labelling these actions “saving measures” is inaccurate, for they would be more accurately described as “fee increases,” Vísir reports.

Treasury outperforms forecasts

At a press conference last Friday, Bjarni Benediktsson, Minister of Finance and Economic Affairs, revealed that the state treasury is projected to post a primary surplus roughly ISK 100 billion ($760 million / €703 million) higher than initially estimated when the 2023 budget was ratified last year.

Consequently, the treasury is expected to show a positive balance of ISK 50 billion ($380 million / €351 million), rather than slipping into a deficit. This performance also underscores a significant improvement in the state treasury’s debt position compared to the pandemic period’s forecasts, Vísir reports.

Health sector and public services gain traction

Bjarni also maintained that Iceland had rebounded from the pandemic faster than most nations; economic activity was thriving and the unemployment rate had hit a five-year low. Even as the treasury rides high on its current fiscal performance, the Minister stressed the government’s intent to further solidify its financial standing, while reinforcing robust public services.

A focus point of this endeavour will be the health sector. A dedicated fund of ISK 25 billion ($190 million / €176 million) will be earmarked for the new hospital this year and the next. Bjarni also highlighted imminent contributions to health insurance, nursery homes, law enforcement, higher education, innovation initiatives, the energy exchange, and housing projects, alongside a revamped child benefit system.

Strategic reorganisation to save ISK 5 billion on labour

As part of the ISK 17 billion ($129 million / €119 million) fiscal discipline package for the next year, the Minister indicated that labour costs across state institutions will be reduced by an estimated ISK 5 billion ($38 million / €35 million). Bjarni met with directors of state-run institutions last week to explore the effective implementation of these measures.

In addition, operating costs like travel will be pared down, with greater emphasis on value-driven public procurement. Bjarni also stated that he foresaw great potential in simplifying the government’s institutional framework, digitising operations for optimal fund utilisation, reducing housing costs through shared workspaces, and leveraging joint ventures and competitive tendering.

Revenue-boosting measures: taxes and fees

Matching the scale of the cost-saving efforts, the government also plans to raise additional revenues through several channels. One such measure will be increased user fees for electric and plug-in hybrid vehicles. Fees for tourism services, including cruise ships, are also set to rise, along with a tax hike on fish farming companies commencing in 2024. Additionally, a temporary 1% increase in corporate income tax has been announced for the next year.

“In the corporate sector, the quest to do more with less is perpetual. The same principle should naturally apply to the public sector,” Bjarni remarked. “Even though our financial health is better than we had ever anticipated, there’s no room for complacency. Through digital innovations and efficient operations, I’m confident we’ll successfully implement these planned measures while continually enhancing services to our citizens.”

In the ensuing weeks, ministries and state institutions will commence work on actualizing these measures to achieve the set objectives outlined in the government’s performance plan. More details are expected to be revealed when the budget proposal for the next year is officially presented on September 12.

Not “savings proposals” but “fee increases”

In a post-press conference interview with Stöð 2, Sigmundur Davíð Gunnlaugsson, the Chair of the Centre Party, expressed scepticism towards the measures of the government, which had recently announced a spending hike of ISK 193 billion ($1.45 billion / €1.36 billion).

“What captured my attention, again, is the disingenuous labelling of what they’re calling a ‘savings proposal,’ when in reality, it’s a ‘fee increase.’ This choice of words could be indicative of the government’s mindset; if they aren’t taking all the money from the citizens, then they’re making concessions with it,” Sigmundur noted.

In his assessment, the government’s fiscal strategy would not effectively mitigate the inflation issue. Moreover, he accused the administration of taking counterproductive steps in the wake of the pandemic by ramping up spending, instead of focusing on savings. According to Sigmundur, the current government had surpassed all previous administrations in terms of the rapidity and scale of its spending increases.

When queried about what he considered to be the government’s most pressing duty in the face of rising inflation, Sigmundur articulated his views as follows: “It was openly acknowledged, even by the ministers themselves, that curtailing value creation and production within the country, largely due to the impacts of Covid, while simultaneously printing more money, would inevitably fuel inflation. Therefore, the logical next step, once circumstances permit, is to apply fiscal restraint, focus on savings, and work on reducing debts,” he stated.

“Contrary to this, the government chose the inverse path,” he continued. “After the pandemic subsided, instead of curbing their expenditure and focusing on generating value, they shattered all existing records for hikes in government spending. No previous administration has been as extravagant or has escalated its spending as precipitously.”

“They then hastily convene a meeting, raising expectations for some significant announcement. But no, all we get are discussions about open workspaces and statements implying that combating inflation isn’t the government’s responsibility.”

Iceland’s Economic Outlook “Improving,” Despite Rising Inflation

Bjarni Benediktsson icelandic politics

The annual inflation rate hit 6.7% this morning. It hasn’t been higher since May 2010. In a press conference today, introducing the government’s fiscal plan, Finance Minister Bjarni Benediktsson maintained that the economic outlook was “improving.”

Housing, gas, and clothing driving inflation

According to data published on the website of Statistics Iceland this morning, the annual inflation rate in Iceland has hit a near 12-year high: 6.7% – an increase of almost a percentage point (0.94%) since last month.

The biggest driver for this recent increase has been a rise in the price of housing, gas, and clothing. The price of oil and gas rose by 8.2%, the cost of housing by 2%, and the price of clothing and footwear by 5.3%.

As noted by RÚV, the inflation rate has seen a sharp increase over the past few months. The annual inflation rate was 4.3% in August of last year, and it has risen steadily since then. The first three months of this year have seen the steepest increase, or ca. half a percentage point from December.

The inflation rate has exceeded the Central Bank’s target rates (2.5%) for almost two years, RÚV notes.

Fiscal plan introduced today

Finance Minister Bjarni Benediktsson introduced the government’s fiscal plan today.

“We’re exiting a deep economic depression, in which we employed the state finances to safeguard households and companies … we’ve been protecting our public services and ensuring that we’re prepared to recover when the effects of the pandemic began to subside. I think we’ve been very successful in this regard,” Bjarni stated.

A press release on the fiscal plan echoes the Finance Minister’s statement, stating that “the financial standing of households and companies is strong,” and that the government’s debt prospects have “improved considerably:”

“The government is hopeful that a moderate increase in outlays and continued growth within expanding export industries” will provide “an opportunity to strengthen the (economic) base again and work towards building an even more robust society.”

A few key figures from the press release on the new policy:

  1. The unemployment rate peaked in January 2021 (11.6%). Since then, unemployment has declined steadily, currently sitting at 5.2%, which “is similar to pre-pandemic rates.” The government expects the unemployment rate to fall to 4% during the years that the plan is applicable.
  2. With reference to the Harmonised Index of Consumer Prices, the press release states that although inflation is high, it is lower in Iceland when compared to other European countries. The inflation rate in Iceland, according to the HICP, is 4.4%, compared to the average of 6.2% in Europe. The government hopes to lower the inflation rate with “responsible fiscal management.”
  3. Approximately 7,000 people purchased their first home in 2021, a record number since measurements began. According to the government, the “percentage of households in arrears hit an all-time low in 2021, or 0.9% at the end of the final quarter.”

Matters of emphasis

As noted in the above-mentioned press release, the government will be emphasising several issues in its fiscal plan, among them mental health. The policy area will receive a permanent increase of ISK 500 million ($3.9 million / €3.5 million) in 2023, and an additional increase of ISK 100 million ($800,000 / €700,000) each year for the following two years.

Other notable issues that the government will be emphasising in its policy are investments in research and innovation (ISK 25 billion); combatting the long-term social and health-related effects of the pandemic (ISK 3 billion); and defence and cyber security (ISK 2.2 billion).

2.6% of government spending will be allocated to environmental issues. There was no mention of a national stadium in the fiscal plan.

The fiscal plan will be in effect for the years 2023-2027.

 

This article was updated at 12:48 PM.

Icelandic Government Takes Measures to Protect Economy from Impact of COVID-19

Katrín Jakobsdóttir

At a meeting this morning, the Icelandic government approved an action plan intended to minimise the negative impact of COVID-19 on the Icelandic economy. Due to the drastically changed economic conditions, the government is revising its fiscal policy and will delay presenting its budget bill until May.

“The COVID-19 epidemic will have a direct impact on economic activity and the state of the National Treasury,” a government press release reads. The national economy is in a good position to absorb the impact, the press release goes on to say, but is nevertheless “vulnerable to the external effects” of the virus, which can “already be noted” in the economy.

In order to protect the economy, the Icelandic government will take the following measures:

  • Companies that experience temporary operational difficulties due to a drop in income will be given leeway, e.g. with later deadlines to submit taxes and public fees.
  • Consideration will be given to temporarily suspending fees that are burdensome for tourism companies, e.g. overnight tax, which will be temporarily suspended.
  • A marketing campaign will be launched overseas when conditions are created to promote Iceland as a destination, as well as a campaign to encourage Icelanders to travel domestically.
  • Measures will be taken that can stimulate private consumption and demand, e.g. with tax or support systems.
  • Increased energy will be put into public construction projects in the current year and the coming one.
  • Active consultation will be established between the government and the Icelandic Financial Services Association on their response to the foreseeable liquidity and payment difficulties of companies in tourism.
  • The Housing Financing Fund’s deposits with the Central Bank will be transferred to banks’ deposit accounts to support banks’ and creditors’ leverage to lend to their clients.

The government is currently reviewing the current fiscal policy in consideration of the altered economic circumstances. The presentation of the new budget bill, originally scheduled for April 1, has been delayed until after mid-May.

“In conjunction with work on the revision of the fiscal policy, a special investment effort is underway which will entail a significant increase in the National Treasury’s investment level in the coming years,” the press release states. The plan assumes the planned sale of Íslandsbanki, currently in state ownership, will occur during the budget period in whole or in part, “but only if conditions for sale are favourable.” A bill on collaborative investment in road works will also be presented in the spring, a further effort to support future investment.