Government measures to facilitate private sector wage settlements

• Eleven measures to facilitate wage settlements
• Changes in income tax lead to a rise in disposable income for all wage-earners
• Total reduction in personal income tax ranging up to ISK 16bn during the electoral term
• Campaign for construction of 2,300 subsidised flats
•  Measures to meet the needs of less wealthy renters and first-time homebuyers
•  Increased collaboration with social partners through establishment of a macroeconomic council

Today the Government of Iceland approved measures in connection with private sector wage settlements. The measures are presented in eleven items centring on various areas of taxation, social affairs, and housing affairs, as well as fiscal and economic policy reforms. An important premise for the Government's measures is that private and public sector wage settlements must not lead to economic instability. The Government's measures take account of the fact that the proposed private sector wage agreements focus in particular on the lowest wages, with the aim that minimum wages shall rise to ISK 300,000 over the contract period.

Among other things, the Government will push for changes in personal income tax, which will lead to an increase in disposable income for all wage-earners, particularly those at the middle income level. For example, the disposable income of roughly 65% of full-time employees will rise by about ISK 50,000 or more per year, and the disposable income of wage-earners with average income will rise by nearly ISK 100,000 per year. The changes will also lead to a simplification of the income tax system and will increase transparency and efficiency, as tax brackets will be reduced in number from three to two. The personal deduction will rise in line with changes in the price level.

With the measures, personal income tax will decline by as much as ISK 16bn during the electoral term. This is equivalent to nearly 13% of Treasury revenues from personal income tax, according to the 2015 National Budget.

The Government also pledges, in cooperation with the Association of Local Authorities in Iceland and the social partners, to create improved conditions for development of the housing market. An increase in the number of less expensive, economical flats will be promoted, with the aim of providing long-term rental housing for low-income families, and a campaign will be launched for the construction of 2,300 subsidised flats during the 2016-2019 period.

Attempts will be made to reduce construction costs, including a review of building regulations and municipal fees. Housing subsidies will be increased in order to support the general rental market and reduce the housing costs of less wealthy renters, and taxes will be changed so as to lower rent prices and increase the supply of housing in the rental market. Measures will be undertaken to meet the needs of first-time buyers, including by authorising young people to use their third-pillar pension savings for the purchase. Work towards the above-specified objectives will be undertaken in an advisory group representing the State, local authorities, and labour market organisations, with reference to the authorities' previous work on housing market reform and the ideas that have been presented in the advisory group.

In order to improve the interactions between fiscal affairs, monetary policy, and the labour market, the Government declares its readiness to establish a special macroeconomic council whose members shall include Government leaders and representatives from the Central Bank, the local authorities, and the social partners.

Other measures focus on equalisation of pension funds' disability burden, cancellation of import duties on clothing and footwear, reduction of patients' out-of-pocket health care expenses, increased contributions to continuing and vocational education, a campaign against tax evasion, simplification and review of the regulatory framework for and monitoring of commercial operations, strategy formation in public sector finances, and collaboration on the formulation of labour market policy and the structure of labour market affairs.

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28 May 2015

STATEMENT

 by the Government on measures to facilitate wage settlements

The Government is prepared to facilitate wage settlements that do not jeopardise economic stability.  It is important that the outcome of labour negotiations and the effects of the measures promoted by the authorities in this context contribute to enabling the Central Bank of Iceland to keep inflation at the inflation target.  It is therefore an important premise for the Government's measures that private and public sector wage settlements must not lead to economic instability. 

          This memorandum describes the direct financial measures presented by the authorities in specific areas of taxation and social affairs, as well as reforms to economic and fiscal policy.

I.                    Income tax.The Government will push for changes in personal income tax that entail lower taxes on general wage income.  These changes also entail simplification of the income tax system, more efficient taxation practice, and increased transparency as regards peripheral effects. 

To this end, the number of tax brackets will be reduced to two, in two stages.  The tax rate in the lower bracket will be reduced from 22.86% to 22.68% as of the beginning of 2016, and to 22.50% at the beginning of 2017. The surcharge for the middle bracket will be cut in half as of the beginning of 2016 (to 1.22%) and abolished entirely at the end of that year.  The difference between brackets in the two-bracket system will be 9.30% when the changes have been implemented in full.  The income threshold for the highest tax bracket will be lowered to ISK 770,000 at the end of 2015 and will be ISK 700,000 when the changes have been fully implemented.   These amounts are subject to changes in the wage index.     

The personal deduction will rise in line with changes in the price level.

The direct loss in revenue to the Treasury because of these measures is estimated at ISK 9-11bn when the changes have been implemented in full.  Because of this, it is not assumed that there will be scope for a reduction of the payroll tax, as has been under consideration.  For the same reasons, the municipalities' share in income tax (the local tax) will be reviewed, in consultation with the local authorities.

The total reduction in personal income tax will therefore amount to as much as ISK 16bn during the period 2014-2017, or just under 13% of Treasury revenue from personal income tax, according to the estimates in the 2015 National Budget.

The latter phase is subject to the general proviso that the changes will only be implemented if it can be considered justifiable in view of economic developments and prospects as they are assessed in mid-2016. 

The aim is to pass the above-mentioned changes into law at the autumn legislative session.

II.                  Housing affairs. Reference is made to the statement on housing affairs, made by the Government in collaboration with the local authorities and the social partners on 28 May 2015, according to which the objective is to increase the number of economical and inexpensive flats, support the rental market and first-time homebuyers, and to ensure an increased supply of residential housing according to measures further described in the statement.  The measures described in the statement aim primarily to improve the position of low-income families and young people in the housing market.  They will provide low-income families that have heretofore not been able to avail themselves of subsidised housing in their local communities with access to inexpensive, secure rental housing.

III.                Equalisation of pension funds' disability burden. The authorities will advocate the revocation of the decision to reduce contributions from the Treasury to equalise the pension funds' disability burden.  This decision is connected to planned changes in the payroll tax.  Continued equalisation of pension funds' disability burden is important, but it is desirable to find an arrangement that is based on clear, impartial premises, is sustainable, and is not dependent on budgetary allocations. 

IV.                Cancellation of import duties on clothing and footwear. The Government will push for the cancellation of import duties on clothing and footwear at the end of 2015, with the aim of increasing households' disposable income and promoting increased retail shopping in Iceland.

V.                  Patients' out-of-pocket expenses.  The authorities are working on a new, comprehensive Government subsidy programme for healthcare services.  The necessary analysis is currently underway, with the aim of protecting the patients with the largest out-of-pocket expense and imposing a ceiling on expense for those needing extensive services.

VI.                Continuing and vocational education.   Funding will be ensured to follow up on the educational authorities' and social partners' collective goals of guaranteeing the operation of continuing education centres and study opportunities for students over age 25, improving conditions for vocational education with regular and increased contributions to a workplace education fund, and beginning work on defining a vocational university level and determining how it could be linked to the upper secondary and university systems.   Increased budgetary allocations for these measures will total ISK 200m per year. 

VII.              Tax evasion.  A campaign will be launched by the Ministry of Finance and Economic Affairs, the Director of Internal Revenue, the local authorities, the Icelandic Federation of Labour, and the Confederation of Icelandic Employers (SA) to fight black market labour and increase public revenues through improved tax collection.  Such a campaign is also intended to promote increased non-discrimination in competitive operations.

VIII.            Labour market monitoring.  The Government reiterates its desire to review legislation affecting the economy, with simplification and enhanced efficiency as a goal.  The aim is to reduce the regulatory burden and simplify interactions with public authorities.  The aim is to reduce firms' expenses, increase productivity, improve competitiveness, and promote increased purchasing power.  The Government will appoint a collaborative committee whose role will be to draft proposals for legislative amendments aimed at merging supervisory agencies and reviewing the conferral of permits and the supervision of commercial activities.

IX.                Labour market measures.  In connection with the Government's statement of 15 November 2013 on private sector wage settlements, a committee has been operating under the aegis of the Minister of Social Affairs and Housing, concerning the formulation of labour market policy and the structure of labour market affairs.   The Government will push for the launch of specific projects related to this policy, in cooperation with the social partners, and will provide the necessary funding up to ISK 25m per year.

X.                  Macroeconomic council. According to the recommendations of the Economic Consultative Forum the interactions between fiscal policy, monetary policy, and the labour market must be improved if attempts are creating conditions favourable for GDP growth are to be successful. The Government declares its readiness to establish such a macroeconomic council.  Members of the council will include current Government party leaders (now the Prime Minister and Minister of Finance and Economic Affairs) and representatives of the Central Bank of Iceland, Association of Local Authorities, Confederation of Icelandic Employers, and Icelandic Federation of Labour, as well as a joint representative of public sector employee associations.  The role of the macroeconomic council will be to conduct a comprehensive assessment of the state of the economy at any given time, with reference to the three aforementioned pillars of economic policy, and estimate the scope for changes in labour market compensation.  The macroeconomic council does not take decisions in economic affairs, and its establishment does not change the legally mandated roles of those tasked with such decisions.

XI.                Fiscal policy.The bill of legislation on public sector finances includes important innovations pertaining to fiscal policy formulation, and it is intended to promote sound economic policy and improved management of public sector finances, including with closer collaboration between State and local governments.  The Government considers it important that consultation take place with the social partners during the preparation of the financial plan submitted before Parliament each spring according to the bill of legislation.   This consultation will be formalised in collaboration with employer and employee associations.

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28 May 2015

STATEMENT

by the Government on housing affairs

The Government of Iceland, in cooperation with the Association of Local Authorities in Iceland, Icelandic Federation of Labour, Federation of State and Municipal Employees, Association of Academics, Icelandic Teachers' Union, and Confederation of Icelandic Employers,  pledges to create improved conditions for the development of the housing market.  Efforts will be made to provide residents of Iceland with a larger range of housing types and with greater housing security, in accordance with the needs of each, particularly low-income families.  The Government declares that it will begin discussions with the Association of Local Authorities in Iceland, the City of Reykjavík, and other local authorities with the aim of launching the following measures:  

1.                   Increased number of economical and inexpensive flats

·         The groundwork will be laid for a new subsidised rental housing system where emphasis will be placed on increasing the number of economical and inexpensive flats so as to guarantee low-income families long-term rental housing.  The subsidised rental housing system will be funded with initial contributions from the State and the local authorities and with direct interest write-downs from the State, at a present value of 30% of the initial cost.  As a result of such a contribution from the State and local authorities, a low-income individual's rent should not, in general, exceed 20-25% of his or her income.  Legal entities planning to build and operate subsidised housing could be municipalities or associations or non-profit organisations whose long-term objective is to build, own, and manage rental housing intended solely for renters below specified income and asset thresholds.  Restrictions will be placed on the removal of flats from the subsidised rental system, and if such removal is permitted, provisions will be included concerning the allocation of sales gains.    

• A campaign will be launched for the construction of subsidised rental housing.  The objective is to build 2,300 flats in the next four years (i.e., 2016-2019), subject to a maximum of 600 flats per year.   Thereafter, the need for continued development of subsidised rental housing will be assessed, including an assessment of the status of public sector finances.  Emphasis will be placed on flats of modest size and on ensuring a social mix in the rental flats. 
•  It is assumed that residents' income will fall into the two lowest quintiles at the time they move into the flats.  This will provide low-income families that have heretofore not been able to avail themselves of subsidised housing in their local communities with access to inexpensive, secure rental housing.  It is not assumed that there will be changes in the local authorities' current prioritisation of clients with respect to social services, nor is it assumed that prioritisation will change with regard to student housing; however, prioritisation in connection with allocation of housing to people in the labour market will be in favour of families with children and families in severe financial distress.  Rules will be adopted concerning how the total number of authorised subsidised flats will be divided up among different target groups and developers.

2.                   Increased supply of housing and reduction of construction costs

• The public sector will make every effort to facilitate the adoption of the most economical methods for residential construction, in an attempt to reduce construction costs.  This includes a review of building regulations and physical planning legislation.
  
• The revision of the building regulation will include a new category of buildings that will be exempt from the regulatory provision on comprehensive design. The emphasis here will be on smaller, less expensive flats.
• Local authorities' fees for lots and road construction will be reviewed with an eye to reducing construction costs. 

3.                   Support for the general rental market

• In order to reduce housing costs further for less wealthy renters, housing subsidies will be increased in 2016 and 2017.   The base amount and tax-free threshold will be increased, with reference to recommendations under consideration by the authorities.  Housing subsidies and tax-free thresholds will be determined in accordance with household size.
• Taxation of income from rent on flats owned by individuals will be changed so as to reduce rent prices and increase the supply of rental flats.   
• Efforts will be made to introduce special legal measures designed to encourage firms to conclude long-term rental agreements, thereby enhancing security in the market.  

4.                   Support for first-time homebuyers

• Efforts will be made to assist those buying their first home.  Prospective buyers will be encouraged to save, and those who have saved a specified maximum percentage of their income for a specified period of time will be permitted to withdraw their savings tax-free; for instance, young people will be authorised to use their third-pillar pension savings as a capital contribution to the purchase of their first flat.  It is important that the amount of mortgage interest subsidies and the reduction provisions be designed in particular to assist families with below-average income.
• Special legislation on mortgage lending to consumers will be passed, and lenders will be given scope to consider factors other than the credit assessment in making a decision on lending.

Work towards the above-specified objectives will be undertaken in an advisory group representing the State, local authorities, and labour market organisations, with reference to the authorities' previous work on housing market reform and the ideas that have been presented in the advisory group.  It is planned to submit a bill of legislation on housing subsidies before Parliament during the spring 2015 legislative session, and that other bills of legislation needed to achieve the above-listed objectives will be presented at the autumn 2015 session and processed by the end of the year. 

Further work will be done on changing the framework for general mortgage financing.  This work will be based on recommendations from the task force on the future structure of mortgage lending, the new EU Directive on collateralised lending and data on the operating premises of new mortgage lending companies, and the position of the Housing Financing Fund.