Prime Minister´s Policy Address 2008

Mr. President, my fellow Icelanders.

Let me begin this evening by sending my best wishes to Foreign Minister Ingibjörg Sólrún Gísladóttir who is in hospital in the United States following an operation. Since Ingibjörg Sólrún and I formed the coalition government of the Independence Party and the Social Democratic Alliance at Thingvellir last spring, our cooperation has been very good and we have strengthened the personal trust and confidence in each other. Let me speak for all of members in this forum as I wish the Foreign Minister a speedy recovery and an early return back to work.

Fellow Icelanders

According to our parliamentary procedures, my Policy Address was distributed to members in advance with certain reservations. The tradition is that the Prime Minister’s Policy Address contains a comprehensive review of the tasks and issues of emphasis of the Government so that a well-reasoned debate on the issues can take place here in the Althingi. I hope, Mr. President that I may be allowed to amend my remarks from the written text that was distributed to members. I am certain that members will understand this in light of the turbulence that has beset our economy in these last several days.

Our economic situation has in a short time turned sharply for the worse. The Icelandic Government, Icelandic companies, households, the people in the country have seldom faced such difficulties as we now do. Following a prosperous expansion, the world economy has entered a period of calamity and the effects thereof are severely affecting our economy. We all knew that the economic expansion would not last forever, but no one could foresee the storm that came last winter and is now wreaking havoc in the world economy.

We must face the fact that the Icelandic banks, the flagships of our expansion abroad in the past several years, are preparing for a great defensive fight. The sources of finance have run dry, which creates enormous difficulties for Icelandic companies. Those that have expanded rapidly are now on the defence. Icelandic companies have expanded rapidly abroad and in many instances done very well. Profits have been large, and shareholders have benefited. Once the good times cease, the downfall can be serious.

The most serious consequence is the inevitable cut in living standards facing the people in the country. In recent years, we Icelanders have enjoyed the highest living standards in the world. We all demand the best, as it should be. But the Icelandic nation is not a collection of excessive consumers that thinks that a good living standard falls down from the heaven. Our nation knows that the path to prosperity is full of obstacles. We are what we are today because we have experienced difficult times and conquered then.

Just as we escaped misery and poverty many decades ago with optimism and courage as our weapons, we will overcome these present difficulties. We Icelanders do not surrender in the face of adversity and we will not despair in face of the current turbulence. We are all in the same boat, the Government, businesses and the people of the country.

Fellow Icelanders

The Icelandic banks have certainly not been immune to the current turbulence in international financial markets. Many old and venerable banks in a number of countries have disappeared, among the some of the largest banks in the world. Both foreign and domestic banks hesitate to lend and companies have limited liquidity. Although it is too early to render a final verdict, governments around the world are taking vigorous measures to help financial markets, hopefully also now in the United States, in order to prevent the world economy from a total collapse. Nevertheless, it is evident that it will take the international financial system and the world economy a long time to get over this crisis and everything indicates that things may worsen before they get better.

Earlier this week, an agreement was concluded between the Government of Iceland and the main shareholders of Glitnir Bank plc., after consultation with the Central Bank and the Financial Supervisory Authority, that the Treasury would provide the bank with fresh share capital. This was done in view of the tight liquidity of Glitnir and particularly difficult circumstances in international financial markets. The Treasury will provide Glitnir with a share capital equivalent to 600 million euros, or about 84 billion krónur at the time of the agreement and thereby it becomes the owner of 75 per cent of the bank’s share capital.

This measure is not unique, since governments on both sides of the Atlantic have resorted to similar measures in recent weeks and months in order to prevent chaos in financial markets. The purpose of the action in the case of Glitnir was to protect the interests of depositors and customers of the bank and maintain stability in the financial system by ensuring the continued operation of the bank. The Treasury has no intention of owning shares in Glitnir in the long run and will sell its stake as conditions permit. The initiative in this case came from the executives of Glitnir themselves. By no means did the Government seek to take over Glitnir through executive fiat nor was it keen to acquire a stake in Glitnir.

But the measure to help Glitnir is of course not the final action in these times of peril for the banking system. Icelandic banks, as all other banks in the world, are currently on the defence, with the support of governments and other public institutions. I hereby declare that the Government will not hesitate in its determination to ensure with all means possible a stability of the financial system and sacrifice all that may be needed. This task will be done with the interests of the public as a guiding light in order to protect the interests of the people in the country.

Mr. President.

As I have already observed, we Icelanders face a difficult situation. In the minds of many, the outlook is dark. But as was once said, the word ‘hopeless’ does not fit well into our language. Although the outlook is dark at present, as we sail through the eye of the storm, it is comforting to know that all the foundations of our society are solid.

This is evidenced by new figures on economic growth and the trade balance that show more strength in our economy than had been expected. Growth is higher, mostly on account of increased exports because of higher aluminium production and the positive effects of the decline in the exchange rate on exports. The figures of Statistics Iceland show without a doubt that consumption and investment are declining. These two factors indicate that the economy is heading in the right direction. Economic growth is now export-led and not fuelled by spending, and the pressures in the economy are abating fast. The economy has therefore begun to restore its balance anew. And why is this important? Because increased exports and production are powerful weapons in the difficult fight against inflation. The high rate of inflation that we now must live with and is the main enemy of households and companies will not disappear by itself. We must truly fight inflation by increasing our production. The figures also indicate that unemployment will be lower than had been forecast.

The Government will use all means to help the economy achieve balance as soon as possible so that inflation and interest rates can decline. At the same time it will seek to prevent an increase in unemployment from becoming a national scourge. The Government has no control over difficult external circumstances that have deteriorated the nation’s standard of living, but it has certainly not sat idle as some have alluded to. The corporate income tax has been cut further. The stamp tax on first home purchases has been abolished. The access of banks to liquidity from the Central Bank has been widened. The Housing Finance Fund has refinanced housing credits extended by banks and further steps in this direction have been announced. The Treasury has issued large amounts of securities in order to increase resilience in the bond and foreign exchange markets. The foreign exchange reserves have been quintupled over the past two years in spite of difficult conditions in foreign financial markets. And let no one think that we are resting on our laurels.

Public investments are being increased in order to prevent the economy from slowing too much down, thus creating conditions for future economic progress. Nonetheless, care must be taken so as not to go too far, lest a new expansion would be created before inflation and interest rates have been brought down. I believe that the fiscal budget for the coming year has found the right path in these matters.

Mr. President

In the Policy Statement of the Government, it is stated that it will be a liberal, reforming Government for a dynamic economy, a robust welfare system, improved household finances and greater business competitiveness. The emphasis of individual ministries has been guided by these principles as I shall now briefly discuss.

The Ministry of Social Affairs and Social Security has placed emphasis upon the affairs of children and senior citizens. Services have been greatly improved in a government mental health facility for disturbed children and plans are being made to prevent children and young people from drug addiction. A policy program has been charged for the affairs of senior citizens. The number of nursing home spaces will be sharply increased and the multiple occupancy of nursing home quarters will be eliminated. Finally, let me mention a comprehensive review of the Social Security Act where the interaction between the social security system and payments from pension funds will be examined.

The finances of Landspítali, the University Hospital, have improved in recent months. The number of operations has considerably increased and waiting lists have been shortened, such as for angioplasty and other specialised services, for example the psychiatric care of children and teenagers. Tasks have been transferred from the University Hospital to regional health facilities in the South and South-West. A major effort is being launched to improve health-related home services for individuals in cooperation with local governments.

In the pharmaceuticals market, an effort is being made to let competition replace oligopoly. The Althingi has decided to establish a Health Institute, after careful deliberation, as a logical step following new health service legislation. The role of the Institute will be to provide an efficient health service and create room for a variety of ways to operate health services. This is one of the prerequisites for ensuring that we can all in the future have access to health services, regardless of means.

The Ministry of Commerce is drafting a comprehensive policy for consumer affairs. Legislative proposals are being drafted, to be followed by measures over the next several months and years, such as in the area of debt intermediation.

The Government is keen on fostering education and knowledge through the educational system, through science and research. No other country in the OECD devotes as much money in terms of GDP to education as we do and nowhere within the OECD are there people of all ages enrolled in formal study, more than 30 per cent. During its last session, the Althingi passed legislation on nursery schools, elementary schools, secondary schools, public universities and the education and hiring of teachers. This new legislative framework creates the foundation for an education policy that opens innumerable opportunities for the Icelandic educational system. A new bill on adult education will be presented in the autumn session. This will complete a full review of the entire educational system over the past two years.

Various cultural activities are in full bloom and Icelandic artists carry the beacon of our nation wide and far. Many feats have been achieved in sports and there is a great determination to get into the front ranks of scholarship and science. I was personally very pleased when an old Japanese schoolmate of mine came to Iceland in order to establish a sizeable fund with the University of Iceland to foster cooperation between Iceland and Japan. This generosity bears witness to the friendship and foresight that hopefully will benefit many young people far into the future.

Mr. President.

A great awareness has been awakened for the environment throughout the world in recent years, as the consequences of air quality changes have become increasingly apparent. Iceland is not amongst those nations most threatened by air emissions. We must nevertheless adjust to changes in our environment on land and in the oceans and do our share as all other nations must. The Ministry of the Environment and the Ministry of Finance have introduced environmental concerns into public purchasing. The taxation environment of motor vehicles is being amended to encourage a more benign environmental impact. Public entities have decided to increase the number of environment-friendly motor vehicles in their fleets, thereby providing a good example for others. The Ministry of Industry, in cooperation with local governments and oil companies, is working on a project to increase the number of multi-source energy stations around the ring road, thus encouraging the use of vehicles using unconventional energy.

Communications projects are under way around the country. Never has so much money been spent in this area as will be spent in the next three years. The cell phone net is being extended and the high-speed data transmission network will be extended to areas where private companies have found it unprofitable to provide services. A new ocean cable is being laid between Iceland and Denmark.

In the Ministry of Industry, the focus is on energy affairs. Many foreign investors are increasingly interested in establishing a variety of energy-based industry in the country. The tax environment in Iceland is favourable and companies are increasingly interested in using electricity from renewable energy sources. The Government has been accused of focusing on the aluminium industry as a large-scale user of electric power rather than encouraging a diversified energy-based activity. This is not the case. An aluminium oxide plant is being established near Akureyri and a data storage centre is expected to be erected near the town of Reykjanes. Two solar grade polysilicon plants are under consideration. All these are examples of energy-based production seeking “green” energy.

The strength of the fishing industry has become clearly apparent in the ability of fishing companies to adjust to the one-third cut in the cod catch quota in the last fisheries year. Higher fish prices abroad and the decline in the exchange rate have certainly helped in this adjustment. In spite of the adjustment measures taken by the Government, it is evident that this cut in the fish catch proves difficult for fishing communities and those working in the fishing industry. It is imperative that we adhere to our fisheries conservation policy, since it is the only way to strengthen the cod stock so that it will become possible to increase catch quotas again.

The implementation of new EU food legislation here at home is important if we intend to maintain our position in the internal market of the Union for fish products and at the same time strengthen our possibility of exporting agricultural products. A legislative proposal to this effect will be reintroduced this autumn, after several amendments. All the amendments have the purpose of strengthening our authority to ensure food quality and create an efficient quality-control system. It is and will be the policy of the Government to safeguard a strong agriculture and food industry in the country and make use of the opportunities provided with comprehensive food legislation.

Mr. President.

We Icelanders must not be discouraged in the current turbulence because the future prospects of our nation are bright. I am convinced that if we continue on the path we have marked for ourselves in recent years we will fare well and excel in the community of nations. Let me make five points:

• The nation possesses natural resources that are becoming ever more valuable in a world that is increasingly demanding more food and energy year after year. Our fishing grounds, our geothermal energy, the hydro energy in our glacial rivers, our clean spring water and our magnificent nature are all natural resources that are the envy of other nations. We should endeavour to make use of these resources in a sustainable manner as much as possible.
• Through the determined cuts in taxes on individuals and companies, we have fostered initiative and entrepreneurship that have led to remarkable progress in most areas of our society.
  
• The public sector has removed itself from many areas of economic activity and created room for private initiative for the good of all.
  
• The nation is in agreement that we must possess a strong welfare system that supports individuals in times of need.
  
• Our nation itself is the greatest resource of all. Its characteristics have placed us in the front rank of nations. And with ever-growing education we can achieve still more.

Mr. President, fellow Icelanders

The most important task of the next several months is to bring inflation down. It has a damaging influence on households and businesses. As soon as we see results in this fight, interest rates will begin to decline. As the economy comes back into balance, the exchange rate will strengthen, since it is far too low at present.

Throughout the centuries, we have always showed stamina in face of adversity and continued on our course. We have learned from having lived in a difficult country that empty words and exclamations are of no help. Let our actions count. That is how we will overcome our present difficulties. We must all work towards the same goal; apply a range of measures, all of which will take time. The Government will lead on this path.

Thank you.