Table of Contents

  • This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Iceland were reviewed by the Committee on 14 June 2021. The draft report was then revised in light of the discussion and given final approval as the agreed report of the whole Committee on 25 June 2021.The Secretariat’s draft report was prepared for the Committee by Hansjörg Blöchliger and Vassiliki Koutsogeorgopoulou, with inputs from Sigurður Jóhannesson and Marías Halldór Gestsson from the Institute of Economic Studies of the University of Iceland and Eunha Cho, consultant with the OECD Economics Department, under the supervision of Vincent Koen. Research assistance was provided by Natia Mosiashvili, and editorial support by Gemma Martinez and Sisse Nielsen.The previous Survey of Iceland was issued in September 2019.Information about the latest as well as previous Surveys and more details about how Surveys are prepared is available at www.oecd.org/eco/surveys

  • After a deep contraction, the economy is recovering from the COVID-19 pandemic on the back of robust export growth.

  • Iceland is recovering from a comparatively mild COVID-19 health crisis. The number of victims and the stress on the health system have remained low. A smart testing and tracking strategy helped the authorities to identify infections early and to implement targeted health measures. Containment was short and less restrictive than in many other countries, and all domestic restrictions were lifted at the end of June 2021 (). Preschools and primary schools operated almost without interruption, while remote learning became more widespread at secondary and tertiary level. International borders remained open to the Schengen area, with the rules on testing and quarantining gradually being eased since spring 2021. Vaccination is progressing fast, with all people over 16 years old planned to get at least one dose by early summer.

  • Iceland is an innovative country, but has untapped innovation potential. Strengthening innovation, especially in the ICT area, is crucial for strong productivity growth and performance in an increasingly digitalised world, as well as a sustained recovery from the COVID-19 pandemic. Ensuring more effective public support for business R&D is important. The R&D tax incentive scheme is generous by international comparison, but take-up has been low and many smaller firms have not been inclined to innovate. Following increased support, outcomes need to be monitored regularly. Adopting new technologies is also essential for stronger innovation outcomes. Competition-friendly framework conditions are key to sharpening firms’ incentives to adopt advanced technologies. The public sector too could become more digitalised. The education system needs to provide relevant skills. Participation of adult workers, especially the less educated, in re-skilling and up-skilling programmes should increase further. At the same time, business and universities need to collaborate more to maximise knowledge flows, with important benefits for innovation and society.

  • Iceland relies far more on renewable geothermal and hydropower energy than any other OECD country. Even so, the country’s per capita carbon (or greenhouse gas) emissions remain above the OECD average, partly because of emission-intensive aluminium smeltering. The government committed to reduce emissions from their 2005 level by 40% by 2030 and in 2020 updated its climate action plan covering 48 individual policy measures. This chapter presents a policy framework to reach the climate targets in a sustainable, cost-efficient and inclusive way. Climate action should first and foremost rely on comprehensive carbon pricing, via a carbon tax or an emission trading system. All sectors and carbon emission sources should be covered, and the government should commit to a gradual increase of the carbon tax rate. The government should support innovation and investment in green infrastructure, particularly in carbon capture technology, low-carbon fishing vessels and soil conservation. To ease the transition to a low-carbon economy, Iceland should remove entry barriers for new and innovative firms, foster the creation of green jobs, and invest in adequate skills. To garner political support, proceeds from carbon pricing could be redistributed to households and firms, at least partly.