Iceland was the fastest growing European economy in the first half of the year.
Iceland was the fastest growing European economy in the first half of the year. 1Rapid growth has gone hand-in-hand with a buoyant labour market, with negligible unemployment and 30,000 more employed persons than in late 2020.
The vibrant economy has given rise to strong demand pressures, one manifestation of which is high inflation. Inflation is not unique to Iceland but has proven stubborn in recent months. The priorities of the 2024 fiscal budget proposal, introduced today, reflect this reality.
Prioritisation in favour of important infrastructure and public services will characterise the coming year, and the Government will continue to put its thumb on the scales to reduce inflationary pressures in the economy.
Primary balance nearly ISK 100bn more favourable than previously estimated
The Treasury primary balance for 2023 is projected to be nearly ISK 100bn more favourable than was expected at the time this year’s National Budget was approved, as revenues will be ISK 50bn higher than expenditures net of interest expense and interest income. The primary balance was already positive in 2022, for the first time since 2019, and the improvement between 2021 and 2022 exceeds ISK 190bn. Iceland’s economic history contains few examples of such a robust improvement between years. The primary balance is expected to keep improving in 2024, when adjustments are made for items that skew the comparison with 2023, such as one-off revenues from Landsvirkjun’s sale of Landsnet at the end of 2022. If this trend continues, the overall balance could turn positive in the near future.
A markedly improved performance has supported these positive developments, as can be seen in the Treasury debt position. If estimates are borne out, the debt-to-GDP ratio will decline gradually and fall below 31% by end-2024.
Support for households alongside an improved Treasury outcome
Concurrent with the marked improvement in the Treasury outcome, emphasis has been placed on safeguarding real wages and strengthening the systems for housing and child subsidies. The income tax system reforms adopted in stages in 2020-2022 have undeniably proven their worth. The system promotes stronger real wages, particularly for those with the lowest income. At the beginning of the year, the personal deduction is to increase by just over ISK 5,000 per month, and the tax-free threshold will rise by just over ISK 16,000. An individual with a monthly income of ISK 500,000 will therefore pay ISK 7,000 less in income tax in January 2024 than in December 2023.
Focus on consolidation
The Government has worked to contain demand growth and inflation in the past two years and looks set to keep doing so in 2024, when the impact of economic consolidation will be felt more keenly.
In addition to the sharp recent turnaround the budget proposal provides for ISK 17bn in measures to slow down expenditure growth. Of that total, Government institutions’ wage costs are estimated to decline by ISK 5bn, although front-line activities in the healthcare, law enforcement, judiciary, and educational systems will still be safeguarded.
Furthermore, other operating costs such as travel expenses will be reduced, and the aim is to save an additional ISK 4bn through more efficient and economical public procurement. Moreover, there will be further consolidation within Government ministries and new projects scaled down, generating up to ISK 8bn in streamlining.
Changed fee structure for motor vehicles and traffic
Alongside spending consolidation, a number of measures on the revenues side are planned. The first step in a new fee scheme for motor vehicles and traffic will be taken in the coming year, as has been discussed. A new, simpler, and fairer system will be adopted, in which payments are linked more closely to usage. This will help make it possible to undertake ambitious development projects alongside necessary road system maintenance.
The hotel accommodation tax was temporarily suspended during the pandemic. All else being equal, the tax will be reinstated at the turn of the year and will also be levied on cruise ships. On the other hand, fixed nominal rate excises apart from motor vehicle taxes will not move with the price level. This is a departure from the previous year, when these levies were subject to price level adjustments. Because of this, the levies in question will only be increased by 3.5% at the turn of the year, reducing them by ISK 3bn relative to the level if the levies had held up in real terms.
Prioritisation for a strong society
In accordance with the main focus of the budget proposal – to continue improving the Treasury outcome and combat inflationary pressures – there are no large new expenditures. Nominal Treasury expenditure growth is driven mainly by wage growth and price level changes. These changes are estimated at ISK 68bn in 2024, or about two-thirds of the increase on the expenditures side, and are proportionally large in historical terms. On the other hand, investments in important infrastructure and growth sectors in the economy will continue, and services to the public will be strengthened and improved.
Major increase in funding for hospital construction
Healthcare is in the foreground, as before. The construction of the new Landspítali hospital is projected to continue apace. Year-2024 budgetary appropriations for the project total ISK 24bn, an increase of nearly ISK 10.5bn between years. Actually, though, investment in the new hospital is estimated at just over ISK 45bn in 2023 and 2024 combined, owing to the utilisation of accumulated appropriations from previous years. In all, spending on healthcare will increase in real terms by over ISK 14bn year-on-year. In addition to the hospital construction project, funds are allocated to the operation of new nursing home space, budgetary appropriations for healthcare institutions and medical insurance are increased, and funding for the newly finalised contract with specialist physicians is secured.
Continued strong residential development
The stock of newly built homes has grown significantly in 2023, and residential investment remains strong, with the number of properties under construction at or near a historical high. The Government will continue to contribute to strong development by doubling its initial equity contribution for rental housing in the public system. This means that 1,000 Government-subsidised properties per year will be built in 2024 and 2025 instead of 500. Similarly, consideration will be given to additional authorisations for help to buymortgages in accordance with this objective, as estimates in connection with the loans are scheduled for review during the second round of Parliamentary discussion on the budget proposal.
Strong investment in R&D, outpacing many peer countries
Reimbursements of companies’ research and development (R&D) expense are estimated at ISK 15bn in 2024. In recent years, the Treasury has substantially expanded its investment in the field, and now there are few countries that invest more in R&D than Iceland does.
This support has already borne fruit: job growth in the high-tech and intellectual property industries has overtaken other sectors in the past three years, and export revenues have increased significantly. It is hoped that the benefits of this investment will grow year by year, with a wide range of desirable jobs that support prosperity throughout Icelandic society.
New child benefit system covers an additional 3,000 families
The latter phase of the new child benefit system will take effect at the turn of the year. The changes that have been implemented in the past two years have provided child benefits to 3,000 more families than would otherwise have been covered. Furthermore, the new structure is economical for families with children in that it features contemporaneous payments of child benefits.
The Government has also emphasised protecting the purchasing power of social security system benefits in recent years. An example of this is the decision to increase benefits in excess of budgetary appropriations in mid-2022 and 2023 to counterbalance inflation.
Strong support for social, housing, and insurance affairs
Largely because of the above-described measures, the second-largest increase in expenditures is in social, housing, and insurance affairs. Expenditures for the affairs of political asylum applicants and refugees have also increased significantly, in tandem with the recent growth in these groups. Total appropriations for functions involving immigrants, political asylum applicants, and refugees will equal just over ISK 15bn, an increase of ISK 7bn year-on-year in real terms.
Other priorities:
- Investment contributions for transportation development increase by ISK 2.4bn year-on-year.
- Operational contributions to strengthen tertiary education increase by ISK 1.3bn.
- Increase the number of students in vocational and technological programmes at the upper secondary school level.
- Support for privately operated media to double between years.
- Appropriations for defence are increased, in part to support temporary joint projects in Ukraine.
- Preparations for a comprehensive review of the disability benefits system will continue in 2024.
- Support for domestic grain production.
- Support for the purchase of rescue vessels for Landsbjörg.
Minister of Finance and Economic Affairs Bjarni Benediktsson:
“Iceland stands on solid ground, and it is of vital importance to sustain the progress we have made. A rapidly improving outcome and continued fiscal consolidation foster economic stability. Inflation could fall swiftly at the same time, but a joint effort is needed to bring that about. Positive developments in this area are Priority #1 for society as a whole. There is clearly much to be gained.”
Improved digital presentation
This year, the budget proposal is published in its entirety in digitised format on the Government of Iceland website. The objective of online publication is to provide wider access to information by using digital solutions while cutting back on printing, for the benefit of the environment. Attachments and data are also available on the Government’s website, as are budget proposal supplements and analytical reports.