Support for a robust economy and improved government finances
EyþórIn the fiscal budget proposal for 2025, introduced today, emphasis is placed on the prioritization of government spending in favour of vulnerable groups within existing expenditure frames and on improving the Treasury performance with targeted consolidation in public sector activity. In this way, fiscal policy supports the lowering of inflation and creates more favourable conditions for reduced interest rates. Healthcare spending and social welfare programs will be protected in accordance with the Government’s policy of protecting vulnerable groups while supporting a robust economy. Both are important, as increased value creation in the economy lays the foundation for a strong welfare system.
The objective for 2025 is for the Treasury performance to improve markedly relative to the updated outlook for 2024, or by 0.4% of GDP, and for the overall deficit to equal just under ISK 41bn, the equivalent of 0.8% of GDP, as compared with a deficit of ISK 57bn in 2024. This is a significant turnaround from the pandemic era, when the Treasury deficit rose to above 8% of GDP. Furthermore, in 2025 the Treasury primary balance – i.e., excluding interest income and expense – is expected to be positive by over ISK 36bn, or 0.7% of GDP, which represents a year-on-year improvement of more than ISK 4bn.
It is estimated that Treasury debt, in terms of the Public Finance Act debt rule, will equal just over 31% of GDP at the end of 2025, a decline of 0.7% of GDP between years.
Welfare systems protected despite a reduction in expenditure growth
The fiscal budget proposal emphasizes modest real growth in expenditures, with prioritization and streamlining in the interest of vulnerable groups. In addition to overall consolidation and other expenditure cuts specified in the fiscal strategy plan, the fiscal budget proposal allocates 9 bn measures to reduce expenditure included in the fiscal strategy plan to individual expenditure items. These changes deliver a combined ISK 29bn reduction in spending in 2025, compared to previous estimates. This fiscal space will be used in part to prioritize spending towards new and urgent programs.
The social welfare system will be strengthened:
- A new disability system taking effect in September 2025 will significantly improve the living standards of disability pensioners.
- Senior citizens’ living standards will also improve, with a 46% increase in the tax-free income threshold for the elderly, starting at the beginning of 2025. For an individual this can increase disposable income by roughly 140 thousand ISK per year (about 1.000 USD at current exchange rates).
- Greater weight will be placed on the integration of refugees and immigrants into Icelandic society, and budgetary allocations aimed at shortening the processing time for applications for international protection will be increased.
Improvements in transportation:
- New construction and maintenance of the road system will continue to be a priority.
- Allocations to the development of transportation infrastructure and public transit in the greater Reykjavík area will be increased by over ISK 6bn.
Healthcare a continued priority:
- In all, allocations to healthcare will increase year-on-year by ISK 10.4bn at constant prices, or 3%.
- Funding for healthcare institutions and health insurance will be increased due to a growing and ageing population.
- Increased funding will be allocated to the operation of new nursing homes.
- Allocations for pharmaceuticals and assistive devices will increase by ISK 1.3bn.
- The construction of the new Landspítali hospital will continue apace, with ISK 18.4bn allocated to the project in 2025.
Investment and capital transfers:
- Construction will begin on a new prison to replace Litla-Hraun.
- The first steps will be taken towards the construction of a new national arena for indoor sports.
Research and development
- Continued support will be allocated to companies to cover research and development expenses.
Additional support for young families
It is vital to face the fact that the most effective treatment for inflation – a high Central Bank interest rate – affects leveraged households most strongly. Young people’s interest burden has increased faster than that of other age groups. Priority is given to Government measures to support the objectives of long-term wage agreements, which provide targeted support to families with children, renters, and heavily leveraged homeowners during the term of the agreements. Among these measures are interest subsidies paid in the past year to households with mortgages, a significant increase in the base amount of housing subsidies and in the threshold for the subsidies, and a sizeable boost in support for families with children. These measures are estimated at ISK 14bn in 2025. In connection with the finalization of long-term wage agreements, the Government has pledged to support the construction of 1,000 homes per year during the term of the contract with initial contributions for general housing and for equity loans. Financing for these measures has been secured.
Taxation of motor vehicles and fuels: the main tax system reform
Alongside a modest real increase in expenditures, tax changes in 2025 will take account of the Government’s responses to economic developments and the impact of technological advances on its revenue base.
The most prominent tax system reform lies in the change to fees charged on motor vehicles and fuels. With rapid changes in energy sources for transport and the advent of ever more fuel-efficient engines, revenues from motor vehicles and fuels have fallen sharply. In response to this trend, it has been decided to adopt a per-kilometer fee for motor vehicle use and stop charging the previous levies such as excise taxes on petrol and oil fees for diesel fuel. At the same time, carbon fees will be increased in order to maintain the incentive for energy switching.
The first step in this change was taken at the beginning of 2024, with the introduction of a per-kilometer charge on the use of electric, plug-in hybrid, and hydrogen-powered cars. The second step will be taken at the beginning of 2025, with the introduction of a per-kilometer charge for fossil fuel-powered vehicles. Not only do these changes provide further support for Treasury revenue generation, but they also introduce a fairer and more effective fee system, where those who use the road system pay more and account is taken of vehicle weight and the associated wear-and-tear on the road system.
With the adoption of usage fees, the previous petrol and oil charges will be discontinued. Other unit levies rise by 2.5%, in accordance with the Government’s declaration in connection with wage agreements and in accordance with the inflation target, even though year-2024 inflation is estimated at 5.2%.