www.oecd.org/eco/surveys/economic-survey-iceland.htm

OECDOECD Economics

2015 OECD ECONOMIC SURVEY OF ICELAND

Stability and productivityReykjavik, 1 September 2015

2

Thanks to: • A substantial depreciation of the krona.• The tourism boom.• Higher consumer income and lower debts.

The economy is recovering steadily

800

900

1000

1100

1200

1300

1400

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Real GDP

Billion ISK

Source: OECD, Economic Outlook 97 database and long term baseline

3

How’s life in Iceland? Good overall

Income and wealth

Jobs

Housing

Work-life balance

Health

EducationCommunity

Civic engagement

Environment

Safety

Life satisfaction

0

5

10

Iceland OECD

4

Wage inequality is low

Note: Interdecile ratio (P90/P10) of gross earnings.

Source: OECD Labour Force Statistics - Decile ratios of gross earnings

0

1

2

3

4

5

6

0

1

2

3

4

5

6

ITA

SWE

NOR

BEL

FIN

CHE

DNK

NZL

NLD

ISL

JPN

FRA

LUX

GRC SV

N

ESP

AUS

DEU

AUT

CZE

GBR SV

K

PRT

CAN

IRL

POL

EST

HUN

KOR

TUR

ISR

USA

Interdecile ratio P90/P10 Interdecile ratio P90/P10

Icelandic high-income workers earn three times as much as low-income workers

5

Lifting capital controls,

while preserving stability

6

Foreign-owned ISK “overhang” declining, but still large

Source: Central Bank of Iceland

7

• The government’s plan to lift capital controls is a welcome step in the right direction.

• Macroeconomic stability will be crucial to minimise the risk of disorderly capital outflows.

• The voluntary approach to winding up the failed banks will facilitate the return to global capital markets.

How to lift capital controls?

8

Wage increases will push up inflation

Note: The projections assume interest rates hikes and monetary policy credibility facilitating inflation moving back to target.Source: OECD, Analytical database, Central Bank of Iceland and Statistics Iceland.

-20

-15

-10

-5

0

5

10

15

2003 04 05 06 07 08 09 10 11 12 13 14 15 16

Wage index Real wages

Y-o-y % changeA. Wages

0

2

4

6

8

10

12

14

16

18

20

2003 04 05 06 07 08 09 10 11 12 13 14 15 16

Core inflation CPI

B. InflationY-o-y % change

9

• Focus monetary policy on low medium-term inflation.

• Build up financial and fiscal buffers.

• Safeguard the independence of the Central Bank.

• Strengthen macro prudential tools.

How to enhance economic stability?

10

The budget deficit has been eliminated

Source: OECD, Economic Outlook 97 database

% of GDP

General government net lending

11

But it wouldn’t take much for public debt to rise again

Scenario 1: Budget deficit kept at 0%Scenario 2: Budget deficit kept at 0% and financial assets amounting to 30% of GDP used to repay debtScenario 3: Budget deficit of 2% of GDP after 2016

Source: OECD, Economic Outlook database and OECD calculations.

20

40

60

80

100

120

20

40

60

80

100

120

2000 05 10 15 20 25 30 35

General Government Gross Debt (% of GDP) General Government Gross Debt (% of GDP)

12

• Adopt organic budget law, including fiscal rules.

• Establish an independent Fiscal Council.

• Use assets to pay down costly debt.

• Avoid building up new contingent liabilities, such as HFF.

• Shift tax from income to VAT.

How to ensure fiscal sustainability?

13

How to revive productivity?

14

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2000 02 04 06 08 10 12 14

Growth rate (%) Growth rate (%)

Labour productivity growth has stalled

Source: OECD, Analytical and Economic Outlook databases; Labour Force Statistics and Productivity databases.

15

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Norway Denmark Sweden Finland Iceland OECD

Index USA = 100Index USA = 100

And productivity is relatively low

Labour productivity (average 2009-2013)

Source: OECD, Analytical and Economic Outlook databases; Labour Force Statistics and Productivity databases

16

Barriers to entrepreneurship are high

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

Note: Index scale of 0-6 from least to most restrictive.

Source: OECD, Product Market Regulation indicators database.

The OECD Indicators of Product Market Regulation (PMR) are a comprehensive and internationally-comparable set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable.

17

Especially regulatory and legal barriers

0

1

2

3

4

5

0

1

2

3

4

5

Licences and permitssystem

Rules and procedures²

Administrative burdens onstartups

Complexity of regulatory procedures Legal barriers

Iceland OECD¹

1. The OECD aggregate is an average of data available (25-30 countries depending on the year covered).2. Communication and simplification of rules and procedures.

Source: OECD, Product Market Regulation database.

18

Less than half of students finish high school on time

Note: Successful completion of upper secondary programs within the set time needed to complete.

Source: OECD, Education at a Glance 2014

0102030405060708090100

0102030405060708090

100

ITA

TUR

CHL

MEX PR

TSV

KCZ

EAU

THU

NPO

LG

RC SVN

DEU

FRA

ESP

OEC

DNL

DDN

KIS

LBE

LSW

ECH

EES

TNO

RLU

XFI

NIR

LNZ

LG

BR AUS

KOR

USA

ISR

JPN

CAN

Only with upper secondary level of education Below upper secondary education

A. Educational attainment of 25-64 year-olds, 2012

0102030405060708090100

0102030405060708090

100

KOR

JPN

IRL

SVK

ISR

USA

GRC HU

N

EST

POL

SVN

CAN

SWE

TUR

OEC

D

AUT

BEL

FIN

NZL

GBR IT

A

CHL

MEX NL

D

ESP

DNK

FRA

NOR

ISL

%

%

%

%

19

• Create a productivity commission

• Lower legal barriers to entry and regulatory procedures

• Use the OECD’s Competition Assessment Toolkit

• Support students who are vulnerable to dropping out

Adopt a productivity-friendly agenda

20

More Information…

www.oecd.org/eco/surveys/economic-survey-iceland.htm

OECDOECD Economics

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