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03 November 2001
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Ministry of Finance and Economic Affairs
The Minister's address at Venture Partnering Stockholm.
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Geir H. Haarde |
November 1, 2001 (Check against delivery) |
Address at Venture Partnering Stockholm
Ladies and gentlemen.
I want to start by congratulating the organisers on a successful seminar this morning and I hope that this is only "the beginning of a beautiful friendship" (as they say in Casablanca) for the Icelandic and Swedish companies that are present. The two countries of course have a long common history dating back to ancient Viking times, so it should be safe to say that the foundation for business is good.
It is with great pleasure that I address this seminar and witness this successful Nordic venture first hand.
Iceland and Sweden are in many ways at opposite ends of the Nordic spectrum, Sweden being the largest of the five and Iceland the smallest. Geographically Sweden is 4 times the size of Iceland, the Swedish economy is 28 times larger than Iceland's, and Swedes are 30 times the number of Icelanders. However, Icelanders are reproducing faster, and the good news is that if we keep going at the same rate we will outnumber the Swedes in about 250 years – topping off their 11,5 million!
The two nations are however on equal footing in many "important" respects. For instance they both consume the same quantity of rice per year! They annually both take out 8.1 books from the library (another important fact), but more importantly they consume approximately the same quantities of alcohol per year, around 5.7 liters per person. We could, however, probably "blame" the Swedes for at least 1 of those liters if we examine closely the export figures for Absolute Vodka to Iceland.
Iceland, however, has managed to outrun Sweden in a number of what we could call "per capita races". For instance in GDP per capita where, in the year 2000, Sweden had around USD26,000 and Iceland around USD30.000. Other per capita records that Iceland proudly holds are in the number of mobile phones, internet access and the number of homes with access to computers – per capita.
Other races between the two countries, for instance on the sporting venue, have at times been a bit more difficult for us Icelanders. Handball for example. The Swedish handball team seems to have a very special psychological power over the Icelandic team. We cannot beat the Swedes at handball! And this despite the fact that there is no team that we would want more to win. Maybe because of this history it felt really good last year when our national football team at least managed to beat Sweden in the Nordic Cup!
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As demonstrated - Iceland is not the biggest economy in the world, but there are interesting developments taking place there at the moment and attractive investment opportunities arising. I will now take a few minutes to discuss the current economic situation, recently proposed changes in the tax system, and the financial environment in Iceland. Before I go into the current situation I would like to give you a short overview of some of the changes that have been taking place in the Icelandic economy in recent years.
Structural changes
The Icelandic economy is basically sound at present, both as a result of sensible fiscal and monetary policies, as well as different structural measures undertaken in recent years to improve economic conditions both of industry and households.
In recent years various structural reforms have been undertaken in the Icelandic economy.
The financial market has been liberalised and modernised to increase the freedom of capital movement within the country as well as to and from abroad. This has markedly enlarged the domestic financial market which now offers a variety of new products and instruments. Old-style credit rationing is gone and interest rates are determined in the market place, but of course with reference to the basic rate of the Central Bank.
The pension fund system has been reorganised with the aim of strengthening the financial position of the funds and thereby of future pensioners in addition to strengthening financial saving. Our general pension fund system is now by and large fully funded and supplementary private schemes are becoming increasingly popular.
Furthermore, the Government earlier this year took steps to increase the Central Bank's independence through new legislation designed to make low inflation the sole target of monetary policy.
Tax reductions ahead
Finally, the Government has recently announced wide ranging tax reforms with the main emphasis on the business sector which will mostly come into effect at the beginning of the year 2002. With these changes, Iceland has taken the European lead, along with Ireland, in terms of corporate taxation and created a highly favourable corporate environment. The strong fiscal position and prudent fiscal policies in recent years have enabled the Government to make these changes and respond to declining economic growth without endangering fiscal stability. We have in other words saved up for these tax cuts.
The most important changes in the corporate tax system as proposed by the Government are the following:
- Income tax will be reduced from 30% to 18% as of January 1, 2002
- Net wealth tax will be reduced from 1,2% to 0,6% at the end of 2002
- Net wealth surtax will be abolished at the end of 2002
- The exclusively Icelandic inflation accounting system will be abolished as of January 1, 2002
- Corporations will be authorised to keep their books and draw up their accounts in foreign currency as of January 1, 2002
- Stamp duties will be lowered as of 2003
- Social security tax will increase by 0,77% as of 2003
The important goal of this program is of course to improve the competitiveness of the Icelandic economy, both in order to attract new investment to Iceland as well as to keep existing businesses in the country in the increasingly competitive global environment. It is our hope that this will increase foreign investment and I would like to use this venue to encourage you to consider Iceland for your future investments.
Results of change
The structural changes already undertaken have helped strengthen the Icelandic economy and industry and paved the way for new sectors such as information technology, software, telecommunications and biotechnology – as well demonstrated by the types of companies represented here today. As a result, productivity has increased and economic growth has been higher in Iceland in recent years than in most neighbouring countries. The purchasing power of households has also increased rapidly and unemployment is virtually non-existent. Stability in the labour market has been ensured by the conclusion of longer-term wage agreements which will contribute to a stable operating environment.
Current conditions
Following the unusually sharp upswing in recent years the Icelandic economy is now slowing down and in many respects becoming more balanced than before. These changes followed some turbulence in financial markets last spring when the króna exchange rate declined, following the abolishment of exchange rate bands.
The economy reacted as expected under the circumstances. Import prices increased which led to a temporary rise in inflation. Import demand began to decline and in turn the competitiveness of Icelandic exports improved considerably leading to rising export revenue. The current account deficit is thus in rapid decline.
The rise in inflation that followed the currency devaluation has led to a temporary reduction in household purchasing power. Private consumption is expected to decline by 2 per cent in real terms in 2001 and this contraction along with a contraction in investment is clearly reflected in decreasing domestic demand. Business investment may also decline but the recently announced tax reductions are likely to change these prospects. Some sectors are already contracting, but despite these signs of economic contraction, unemployment is low and the demand for labour still appears to be considerable as evidenced by the high level of imported labour.
Economic policy
Under these circumstances, the main emphasis of the Government's economic policy will be on improving the competitiveness of enterprises, reducing inflation and thereby fostering economic growth. The aforementioned tax reductions are an important contribution towards strengthening the economy. Significant steps in privatisation are also underway this year and next, as major stakes of the state-owned telephone company and in the two partially state-owned commercial banks will be sold. These sales are expected to yield substantial revenue to the Treasury and make it possible to reduce Treasury debt considerably.
As I mentioned earlier, a new monetary policy framework was established last spring when a new Central Bank Act was passed. This marks a watershed in Icelandic economic management as we have now formally charged our Central Bank with the sole task of pursuing an inflation target and ensuring price stability. This new monetary policy framework means that the role of fiscal policy is altered. In a world of freely floating capital movements fiscal policy can no longer be applied to implement rapid, major changes in the economy. Fiscal policy must support monetary policy and the emphasis of fiscal policy will have to be on economic stability in the longer term. This will best be achieved by yielding an adequate Treasury surplus and creating an efficient tax environment, both for business and households.
Ladies and Gentlemen.
The importance of venues such as this one has become increasingly clear in the past few years. Trade liberalisation has probably nowhere been more apparent than in the Nordic countries. The peoples of theses small economies possess important traits that make them highly competitive in the global market place. Our workforce is highly educated and a culture of innovation and exploration is prevalent in our societies. It is, therefore, very important that governments do their best to ensure a market environment that allows the creative spirit of entrepreneurs and innovators to blossom.
In many ways the view of government, as a participant in the economy, has been changing. It used to be that the government was expected to be a prime mover of sorts, that big projects required massive government intervention and assistance to be successful. Now the view is predominantly that the government aids businesses best by providing a suitable legal framework but otherwise by generally staying out of the way. As Ronald Reagan once said: "The nine most frightening words in the English language are: I'm from the government and I'm here to help".
But the government does have a role to play – even if it is in many ways a more passive one than before. The changes in the Icelandic business environment in the past few years have directed Icelandic firms and individuals towards making the world their playground. We aim to embrace progress and to make the Icelandic economy an ideal setting for businesses to thrive and succeed in the global economy.
I sincerely hope that this event will benefit the companies and investors represented and that people will use this occasion to form alliances, partnerships, and other business relationships which will generate opportunities, and of course profits for all of us.
So in accordance with the aforementioned paradigm that government should play a passive role – I will now leave you all to your business and hope that you will have an enjoyable and productive day.