The government's actions against inflation
The state revenue has continued to improve compared to previous forecasts according to a new economic forecast from the Central Bank, and the revenue on the primary balance is now 90 billion better than anticipated at the approval of the last budget.
In addition to the clear policy reflected in the submitted fiscal plan and improved outcomes, the government is now undertaking further measures to combat inflation and further interest rate increases. This supports the actions of the Central Bank of Iceland and counters inflation, improves the revenue, and addresses groups particularly vulnerable to the effects of inflation and interest rate hikes.
Key measures include:
Legislation will be amended so that the salaries of elected representatives and the highest-ranking state officials will increase by 2.5% instead of 6% on 1 July this year. This will ensure that the salaries of senior officials do not create increased inflationary pressure.
Foundation contributions for the construction of rental apartments within the public housing system will be doubled, and contributions for shared loans will be further increased so that instead of 500 apartments being built annually in 2024 and 2025 with government support, there will be 1000 per year. In addition, 250 new apartments will be added to previous plans this year, bringing the total to nearly 800. This supports increased supply in the housing market.
Financial regulations will take effect one year earlier than originally planned but had been temporarily set aside during the pandemic.
A bill for the establishment of a National Fund will be resubmitted to further strengthen the resilience of state finances for the future.
An assessment will be made of the performance of the current financial regulations and opportunities for improvements.
The state revenue will be improved by 36.2 billion króna next year through savings in the operation of the state, including cuts in travel expenses, delays in projects, new revenues, and by reducing inflationary tax incentives as outlined in the government’s fiscal plan.
Of this, projects worth at least 3.5 billion króna will be temporarily postponed to reduce inflation. Among the projects is the new construction of the government offices and the coordination center for response agents.
To protect the purchasing power of disability and old-age pensioners, public pension payments will be increased by 2.5% from mid-year, in addition to a 7.4% increase at the beginning of the year.
The exemption threshold for housing benefits for tenants will be increased by 2.5% for the current year, retroactively from 1 January of this year, in addition to an increase at the beginning of the year by 7.4%.
Legislative changes are being worked on to improve the legal status of tenants in the housing market, and a working group will submit its proposals on this matter before 1 July this year.
Changes to the legal framework for home accommodation will be explored to equalize the competitive position and reduce pressure on the housing market.
Moderate wage increase
A bill will be presented to the Althing concerning that wage increases for elected representatives and top state officials will be smaller this year than the standards set by law. Thus, wages will increase by 2.5% instead of 6%.
This ensures that the salaries of senior officials do not exacerbate inflationary pressure.
Good economic situation and a stronger state
If the recent economic forecast from the Central Bank comes to fruition, the primary balance of the state, i.e. income excluding interest payments, is expected to be positive by nearly 44 billion króna this year. This is 20 billion króna better than expected at the presentation of the fiscal plan in March and 90 billion króna better than anticipated at the approval of the budget for the current year in December last year. There is also an outlook for 10 billion króna better results in 2024 than previously estimated.
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The improvement in state finances following the pandemic is one of the fastest among developed countries. Few economies have grown faster out of the pandemic, and it is expected that economic growth this year will be unparalleled in this country. This substantial economic recovery has accompanied significantly improved state finances, as the employment situation is good, jobs have increased by 10,000 in a single year, activity is high in most industries, and the outlook is for one of the best years in tourism ever.
Rapid economic growth and improvement in state finances contribute to decreasing debt ratios in the coming years, which are favorable in an international comparison. If the Central Bank’s forecast comes to fruition, it is likely that debts as a percentage of GDP will continue to improve and be about a percentage point lower than is projected in the submitted fiscal plan. According to the definition in the Public Finance Act, state debts would then be about 30.5% of GDP by the end of the year instead of 31.4% of GDP. However, the fiscal plan for the years 2021-2025 anticipated that state debts would be about 50% of GDP by the end of 2023.
Savings in state operations reduce inflationary pressure
In the government’s fiscal plan for the next five years, the government anticipates a restraint next year amounting to 8.8 billion króna with increased savings in the operation of state institutions, special additional restraint on the main offices of ministries, and delaying investments. Investments will be postponed for at least 3.5 billion króna.
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In addition, revenue is expected to be improved by 9 billion in the budget for the year 2024. This will include efforts to reduce travel expenses for the Government Offices and state institutions, postpone investments, and reduce state support where inflation is highest. Among the projects that will be further postponed is the new construction of the government offices at Lækjargata and the coordination center for response agents.
Moreover, work is underway on the implementation of revenue measures exceeding 18 billion króna for the budget for next year, which will be reflected in a reformed fee structure for vehicles and increased fees for tourism services. Additionally, the fee for fish farming companies will be increased in 2025, and it is expected that the review of the fishing fee will generate additional revenues totaling 13 billion over the period of the plan. Furthermore, the corporate income tax is to be temporarily increased by 1% for one year in 2025 for the revenues of the year 2024.
Protection for basic services
Income protection systems and welfare services will continue to be exempt from restraint, and no restraint demands will be made on social security, unemployment benefits, healthcare, and health and elderly care institutions. Moreover, the restraint target in the operation of secondary and higher education will be lower than general restraint, or 0.5%, and the restraint requirements on corrections and law enforcement will be lifted for the years 2024 and 2025.
Framework of public finances strengthened
Alongside improved revenue and restraint, the government will implement further reforms in the framework of public finances to promote long-term stability. To this end, the following actions will be taken:
The implementation of financial regulations under the Public Finance Act will be expedited by one year. This is indicative of a rapidly improving revenue and debt situation far above previous forecasts. Therefore, it is deemed inappropriate to provide further leeway in these matters than is necessary.
The Minister of Finance and Economic Affairs will submit a bill on a National Fund at the upcoming Parliament. This will ensure that new revenues will not only be spent on increased expenditures but also to prepare for unexpected future shocks.
The Minister of Finance and Economic Affairs will submit a report to Parliament in the autumn on the international development of financial regulations, where an assessment will be made of the performance of current regulations and opportunities for further achievements will be explored.
Twice as many affordable rental apartments built
The availability of housing for low-income and asset-poor families and individuals will be greatly increased in the coming months. Contributions for shared loans will be further increased, and foundation contributions for the construction of rental apartments within the public housing system will be doubled so that 1000 apartments will be built annually in 2024 and 2025 with government support instead of 500. In addition, nearly 800 apartments will be built this year, an increase of 250 apartments from previous plans.
Funding is secured by leveraging the available margins in the fiscal plan and shifting other projects, as stability in the housing market is a priority for the government. Foundation contributions are allocated for the construction and purchase of affordable rental apartments, which contributes to lower rental prices. Shared loans are available for purchasing new apartments and are offered for first-time buyers within certain income limits.
Furthermore, legislative changes are being discussed to improve the legal status of tenants in the housing market, and a working group will submit its proposals on this matter before 1 July this year.
At the same time, changes to the legal framework for home accommodation are under consideration to equalize the competitive position and alleviate pressure on the housing market.
Countermeasures for pensioners, families with children, and tenants
The government will continue to support those groups that find it most challenging to cope with the effects of inflation and interest rate hikes. To protect the purchasing power of old-age and disability pensioners, public benefits will be increased by 2.5% at mid-year. To ensure that housing benefits are not diminished, the exemption threshold for housing benefits will also be increased by 2.5% retroactively from 1 January 2023. Both are in addition to a 7.4% increase at the beginning of the year.
These measures come in addition to significant support in recent months, including:
Public benefits increased by nearly 9% in 2022 and by 7.4% on 1 January 2023.
The exemption threshold for earnings for disability and rehabilitation pensioners increased to 200,000 króna at the beginning of 2023.
Housing benefits have increased by a quarter since mid-2022, and the exemption thresholds have also been raised in line with the increase in benefits.
Asset limits were increased by 50% in the interest benefit scheme at the beginning of the year.
Child benefits increased at the beginning of the year with higher base amounts and reduction limits, along with a decrease in reduction ratios. Lower marginal taxes mean that around 3000 more families receive benefits under the new scheme compared to before. Additionally, work is underway on the timing of child benefit payments, which will come into effect at the beginning of 2024.
Personal tax credits and bracket limits increased by 10.7% on 1 January 2023. Overall, taxes on households will decrease by six billion króna this year. The average tax rate for an individual with a monthly salary of 450,000 króna will thus decrease by 1.8 percentage points, and by 0.9 percentage points for an individual with a monthly salary of 900,000 króna. Therefore, the disposable income of both households will grow by approximately 100,000 króna a year solely due to the tax cuts.
Source: stjr.is
