2019 OECD Economic Surveys: Iceland 2019

image of OECD Economic Surveys: Iceland 2019

Iceland has rapidly caught up with the richest OECD economies. Favourable external conditions and good policies helped create inclusive growth, low unemployment, low inflation, and sustainable public finances. The economy is very egalitarian, and living standards are among the highest in the OECD. Yet growth is now turning sharply due to a rapid decline in tourist arrivals and weak marine exports, with growth projected to slow to around zero in 2019. Wages are rising faster than productivity and the competitiveness gains, achieved after the 2008 crisis, are exhausted by now. Regulation is stringent. The government should set up a comprehensive action plan for regulatory reform, prioritising reforms that foster competition, level the playing field between domestic and foreign firms and attract international investment. Linking wages more closely to productivity developments could also help maintain competitiveness. A comprehensive skills strategy that builds strong foundation skills and provides the right skill mix would help Iceland to prepare for rapid technological change. The quality of public spending has declined since the 2008 crisis. Providing a better nexus between spending and performance targets in various policy areas could help increase public sector effectiveness.


English Also available in: French

Improving public spending to maintain inclusive growth

Iceland had to deeply reshape the public finances after the 2008 crisis, through both spending cuts and tax increases. The need to act swiftly and boldly left little room for appropriate design in the various spending areas. As a result, the quality of public spending – i.e. the contribution of spending to growth and less inequality - has declined. In particular, public investment remains weak, weighing on productivity, while the disability benefit system is generous, weighing on employment. Effectiveness of government spending is low, especially in education, with PISA results declining despite rising spending. This chapter identifies main challenges in spending for education, health, infrastructure, social security and other areas. Overall the authorities should strengthen the link between spending and objectives in the various policy areas, i.e. by broadening spending reviews. In particular, investment for transport, energy and digital infrastructure should be increased; in education, teacher salaries should be more differentiated and partially linked to performance; in health care, general care should be favoured against specialised care and co-payments for hospital care introduced; the disability system should more strongly aim at labour market integration of claimants; and high implicit tax rates in the tax-benefit system should be reduced, e.g. by abandoning means-testing of child benefits.



This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error