Eight stability measures

Following discussions with employer and employee unions, the Government  presented a package of eight measures designed to promote social and economic stability in accordance with Living Standards Agreement from autumn of last year. Among them are measures that were introduced in connection with the presentation of the fiscal budget proposal and fiscal plan in the beginning of October. 

The measures are as follows: extension of the “Back to Work” initiative, payroll tax reduction through end-2021, financial support for lost company revenues, tax concessions for investment with emphasis on green projects, substantially increased allocations for innovation and food production, reforms in physical planning and construction, reforms in the pension system and the labour market, and several bills of legislation in support of the Living Standards Agreement. 

The following statement was approved, together with the eight-measure package, at a Cabinet meeting this morning.

Government statement on the premises for the Living Standards Agreement

The still-raging global pandemic has had a profound impact on the economy, on businesses’ and households’ incomes, and by extension, on the labour market. On the basis of the Living Standards Agreement, the social partners have been engaged in discussions concerning the premises for the continuing validity of the Agreement.

Since the pandemic struck, the Government has announced – and Parliament has passed into law — broad-based measures and policy actions to protect companies and workers from the pandemic’s adverse effects. Emphasis has been placed on ensuring that the authorities remain flexible and capable of responding to a changing outlook as new conditions arise and the pandemic evolves. Later this week, the Government will introduce the 2021 fiscal budget proposal before Parliament. Also to be presented is the draft parliamentary resolution for the five-year fiscal plan, which describes in greater detail how the Government intends to address these challenging conditions. The plan to be introduced contains a number of items intended to support employment-generating activity during the pandemic, promote stability in the labour market, and ensure resilience during the post-pandemic period.

In recent days, the Government has held discussions with the Confederation of Icelandic Employers and the Icelandic Federation of Labour concerning their assessment of the premises for the Living Standards Agreement and the near-term labour market outlook. Following those discussions, the Government has decided to introduce eight measures designed to promote social and economic stability, as well as the measures that will be announced alongside the presentation of the fiscal budget proposal and fiscal plan.

The Government estimates that the total cost of the measures could range up to ISK 25bn. This figure is highly uncertain, however, not least because the scope of the green investments is unknown. Furthermore, the financial support measure for businesses that have suffered severe revenue losses because of the pandemic has yet to be designed in full detail.

The measures are as follows:

1. Extension of “Back to Work” initiative

The Government has decided that 100% reimbursement of value-added tax on labour, under the “Back to Work” campaign, will be extended through end-2021. The estimated cost of the reimbursements is roughly ISK 8bn.

2. Temporary payroll tax reduction

In order to mitigate the impact of the wage rises that are to take effect at the end of this year according to the Living Standards Agreement, the Government has decided to lower the payroll tax for one year, until end-2021. The payroll tax reduction will be the equivalent of relinquishing payroll taxes on the contractual wage rises that take effect at year-end 2020. The cost of the payroll tax cut amounts to about ISK 4bn.

3. Financial support for businesses that have suffered severe pandemic-related revenue losses

A wide range of measures to support employment-generating activities have already been passed into law. Among them are the part-time unemployment benefits scheme, wage support during the termination notice period, closure subsidies, supplemental loans and support loans, moratoria on payment, and Government guarantees. In addition, financial institutions have been granted vastly increased scope to support businesses. It is vital that these measures be implemented in full. 

In recent weeks and in the wake of tightened public health measures, the Government has given particular consideration to businesses that have suffered severe revenue losses due to the pandemic, with the aim of ensuring, insofar as is possible, that they will have the capacity they need to regain a solid footing when the pandemic has passed. Consideration will be given to providing direct subsidies to companies whose revenues have collapsed because of COVID-19. With such subsidies, the aim will be to sustain necessary minimum operations while the pandemic is ongoing, thereby maintaining business relationships.These subsidies could total some ISK 6bn. Estimates will be prepared in the next few weeks and presented before Parliament no later than at the time the supplementary fiscal budget proposal is introduced.

4. Tax concessions for investment

Work is underway on tax concessions aimed at encouraging and supporting firms that invest in projects designed to promote innovation and competitiveness in the economy. This includes expedited write-offs of new investments, with emphasis on green transformation and climate targets, thereby enabling companies to embark on such investments much sooner than they would have otherwise. Furthermore, ways to encourage the public to participate in the economy by purchasing equity securities will be examined.

5. Increased emphasis on innovation and food production

In connection with the preparation of the fiscal budget proposal, the Government has decided that allocations for innovation will be increased by roughly ISK 5bn between 2020 and 2021. This equals an increase of about ISK 10bn relative to previous years. The measure includes the establishment of Kría, an investment fund intended to promote development, growth, and increased competitiveness in Iceland. In addition, concessions for companies engaged in research and development will be tripled relative to 2017. Moreover, allocations for innovation in food production have increased markedly, including with the establishment of the Food Fund. In this context, the Government will give particular consideration to efficiency and efficacy in food production. 

6. Reforms in physical planning and construction

The Government will introduce reforms in the areas of physical planning and construction, based in part on the findings of the task force on housing affairs and on advisory work done by the OECD for the Government concerning barriers to competition in the markets.

7. Reforms in pension system and labour market

Pursuant to the Government’s statement in connection with the Living Standards Agreement and discussions with labour market federations, the previously announced bill of legislation on legalisation of premiums, equal status of pension fund members vis-à-vis the social security system, and authorisations for the allocation of specified third-pillar pension savings towards home purchases will be introduced before Parliament at the autumn legislative session. Thereafter, the Government will lead strategy formulation in the pension system, in close cooperation with labour market federations and the National Association of Pension Funds. The objective is to publish the results of this consultation in a green paper on pension affairs, to be introduced in spring 2021. The Government will also lead the preparation of a green paper on the future environment for wage agreements and labour market affairs, in close cooperation with labour market federations. The green book on the labour market is also to be published in spring 2021.

8. Presentation of bills of legislation in support of the Living Standards Agreement

In accordance with the Government’s statement in connection with the Living Standards Agreement, bills of legislation on employment terms, rent, amendments to the Bankruptcy Act (switching company ID numbers), and amendments to the Act on Interest and Price Indexation are to be introduced before Parliament in the autumn.