Fiscal budget proposal for 2020: Strong investment and tax reductions

• Personal income tax lowered — reduction process expedited
• Payroll tax lowered
• Strong public investment
• Transportation strengthened
• Research strengthened
• Support for low-income housing
• Continued reduction of Treasury debt
• Incentives for energy exchange

The fiscal budget proposal for 2020 is introduced today and will be presented before Parliament on Tuesday 10 September 2019. The introduction has not previously taken place in as timely a manner prior to the first round of discussions. The purpose is to accede to the wishes of members of Parliament for more advance notice to acquaint themselves with the topic.

Among the salient features of the proposal is that the personal income tax (PIN) will be lowered more rapidly than previously planned, with the full reduction achieved by 2021 instead of 2022. This measure will increase disposable income for the lowest-income persons by just over ISK 120,000. The total annual scope of the measure is about ISK 21bn, or about 10% of the Treasury’s PIN-generated revenues. This is an important element in supporting households when the economy slows down. 

In addition to the reduction in the PIN is the latter phase of the 0.5 percentage point reduction in the payroll tax, which was lowered by 0.25 percentage points at the beginning of 2019. By the turn of the year, the payroll tax will have been lowered from 7.69% in 2013 to 6.35%, supporting job creation and shoring up firms’ operational foundations.

Progress and higher living standards

Many important matters are supported, including funding for changes to the Student Loan Fund, launching of measures to encourage recruitment of teachers and strengthen internships, and increased allocations to scientific and research collaboration.

A major push in road construction lies ahead, and the aim is to participate in the cost of domestic air travel for residents of regional Iceland. 

Energy exchange will be strengthened with tax concessions and grants from the Energy Fund. Allocations for climate change issues increase and, among other things, will be used for carbon sequestration with afforestation, soil conservation, and wetland reclamation. Allocations to patrolling and the highland national park will also increase. 

Measures aimed at increasing nursing staff will be prepared, measures supporting community healthcare centres as the first port of call will continue, and nursing home construction will continue. 

Continued work will be done to enhance the quality of service to disabled children and their parents, and allocations to improve disability pensioners’ standards of living will be increased in line with previous plans. Labour participation by the elderly will be supported, parents’ childbirth leave entitlement will be lengthened, and child benefits will be increased. 

Allocations to housing affairs will be ensured, in connection with the recent standard of living agreements, and measures are proposed in response to housing problems in regional Iceland.

Overall outcome in balance

It is planned that the overall Treasury outcome will be in balance in 2020, which is consistent with the recent revision of the five-year fiscal strategy, although the planned Treasury operating surplus will shrink. This is done in order to create the conditions for the economy to rebalance earlier and to gain a footing for a new GDP growth period, with an eye towards fostering stability and improved living standards.

Environmental and climate issues

Emphasis on climate and environmental affairs show clearly: allocations to environmental affairs have increased by over 24% in real terms since the Government took office. They have delivered, among other things, broad-based climate change measures, major infrastructure development in protected areas, and increased patrolling. Also noteworthy are positive incentives relating to the environment, including increased support for the purchase of home charging stations and rental of environment-friendly vehicles.

Welfare and healthcare in the foreground

In connection with the finalisation of private sector wage settlements, the Government issued a statement on measures to support the settlements. The total scope of proposed measures over the term of the contracts is estimated at ISK 80bn, including just over ISK 16bn in 2020. In addition to the changes in the tax system that were introduced during the prelude to the wage settlements, the Government’s measures include longer childbirth leave, higher child benefits, and a number of measures to facilitate home purchases. Most of these measures will take effect in 2020 and will be manifested in increased allocations — to social and housing affairs in particular.

Countercyclical measures

The strong fiscal position enables the authorities to boost the resilience of the economy and counterbalance the downward cycle with strong public investment during this time of reduced business investment. Allocations to investment total just over ISK 78bn, an increase in real terms of ISK 27bn since 2017.

Large projects include the following:

• Investment in transportation, ISK 28bn
• Increased investment in the construction of Landspítali hospital, ISK 8.5bn
• Purchase of helicopters for the Coast Guard
• Allocations for the construction of a new marine research vessel
• Construction of Icelandic House, the centre for Icelandic studies.

The Treasury’s scope to respond to the slowdown in the economy is due first and foremost to disciplined fiscal management in recent years. The positive outcome, the stability contributions in connection with capital account liberalisation, and other irregular income items such as dividend payments have been used to effect a substantial reduction in Treasury debt, which is estimated at 22% in 2020.

The flexible ISK exchange rate pulls in the same direction, as does the falling Central Bank key interest rate, which has never been lower. Furthermore, the social partners have contributed with the recent wage settlements, which further support economic stability.

Increased confidence in the authorities’ economic management and policy has also been reflected in the strong credit rating of the Treasury, which has never been offered such favourable terms in bond markets.

Presentation of fiscal budget proposal

The National Budget is based on a fiscal strategy and a fiscal plan. Two documents are presented: the fiscal budget proposal itself and a supplement. The supplement shows, among other things, the distribution of budgetary authorisations among Part A entities, projects, and a reserve fund for functions.