17 May Thunder from the north
Bjarni Benediktsson, Minister of Finance and Economic Affairs, Iceland, speaks to great dynamism in a plethora of sectors, including energy, finance, and fish farming; also, he notes that the government has managed the crisis of a decade ago well.
Iceland has fared relatively well throughout the pandemic over the past couple of years, with an even stronger recovery expected in 2022 and 2023, as announced in the fiscal plan. What was your guiding strategy during the pandemic and what issues did you prioritize during this challenging time?
With regards to the strategy that we implemented, I would need to look back at what happened after the financial crisis of 2008-2009 and say that we wanted to learn lessons from the past. Lesson number one was that we wanted to do more and do it quicker, because we believed that if we’d be too slow and go too short, that would be, at the end of the day, more costly than doing too much. Basically, the strategy was to use the full strength of the low indebtedness of the state to support and make the economy as resilient as possible.
When I refer to the financial crisis, I’m referring to the fact that, at that time, we cut back on investment. This time around, we increased the investment percentage for the public sector. Back in 2009, we introduced austerity measures, such as tax increases and expenditure cuts. This time around, we lifted taxes, instead of increasing taxes, and we had no special austerity measures for the public sector, which meant that we were maintaining the good public services, even though we had a deep deficit. We did this in the belief that the pandemic and its effect on the economy would be a temporary situation, even though the period ended up lasting longer than anyone could expect.
With regards to the special measures that we introduced, we can talk about the business cycles and how we try to support the tourism sector and other industries in Iceland which were hit very hard. And on the other side, we can talk about measures that were introduced to support the income of homes and families. With regards to the businesses, we introduced a range of measures, anything from state bank loans to direct grants to helping those who had lost revenue. These measures were all aligned to the situation as it developed. We introduced four packages of measures which were always reflecting the situation as it was at that particular time. There were direct grants and support to larger companies through state bank loans.
The most important and effective measures had to do with supporting companies to maintain employees at work. We introduced partial layoff programs. If you were fully employed, but now you only had a 50 percent position, we would take care of the other 50 percent. This was very successful: it was healthier for the economy and better for us to maintain the employment relationship, rather than having to pay unemployment benefits.
We also went as far as supporting companies that had lost, more or less, all of their revenue. We supported them in laying off people against a promise that, once they would hire again, they would offer jobs to those that had been laid off first. This was done in order to make sure that those companies were still there would exist and would take part in the uprise once the effects of the pandemic were over.
In general, the range of proposals reflected what I said in parliament from the outset: we will make sure that we will do more than necessary, because we were strong believers in utilizing the strength of the treasury to support the economy. The numbers are showing that we did very well because we’ve now regained all the lost jobs during the pandemic. We’re back to pre-crisis unemployment rates.
What about the rest of the macro-economic indicators: gross domestic product growth, the public debt?
We’ve started growing again. We still have public debt ratios which are very healthy. We are introducing our five-year fiscal plan later this month. We believe it’s realistic that we will keep our governmental debt under 40 percent in the five-year plan. Despite an enormous deficit, our debt levels will be okay and, in the European context, they will be very strong. This is due to the fact that we had brought governmental debt down to 20 percent before the pandemic. And we are now in the midst of continuing the privatization of Islandsbanki.
The largest IPO in the Icelandic history, you noted at the time, was “the first step in reducing the state’s risk in the banking sector.” What was the philosophy behind this move, and what does it mean for risk mitigation? Should we expect to see more of these IPOS in the future in Iceland?
It was not only the largest IPO, but also the largest successful privatization project in Europe last year. The risk mitigation is part of the privatization. The Icelandic state is among the largest participants in the financial sector in Europe, at the beginning of last year, we fully owned two out of three systematically important banks in Iceland, which is way too much. We needed to withdraw from our ownership role in the financial sector. We still own the largest bank, which is Landsbankinn, but we have a cross party political support behind privatizing Islandsbanki, which historically has been a private bank. We took Islandsbanki over as part of a program that we created when we needed to lift capital controls, but we never had the intention to be owners of Islandsbanki for the longer term. Risk is mitigated by the state withdrawing from owning a good majority of the banks, and we have been very happy with the process so far and are in the middle of deciding on the next steps.
I would like to talk about the 2022 government’s budget bill, the targets for funding and what you expect for the country’s economic performance 2022/2023.
The sale of Islandsbanki is part of our funding program. We hope to be successful in continuing to sell off the state’s holding. What we’ve seen in recent months is a stronger than expected income for the state, so regarding the performance under the current budget, we are outperforming, which is a good sign for the financial side or the funding of the deficit. Still, we are in deep deficit, it has to be admitted, but we are not worried about the funding that will be needed.
The latest economic outlooks are pretty strong. The biggest uncertainty is with regards to the labor union contracts that will open up later this year. Due to the increased inflation, there is pressure at the negotiating table.
We also have a difficult situation with the housing market in Iceland now, where there is a lack of offering of new housing, which is a challenge. The demand for new housing has not been met. The demand is way stronger than the offering. That has led to price increases, which again drives inflation. What we are missing out of the equation is the planning side of things, where the municipalities provide for the necessary land to start new projects. And we are probably in shortage of workers, too. This is where we need to cooperate better and find the way out of the current lack of offering. There are too few new buildings under construction at the moment.
Regarding the reduction of emissions, the government of Iceland has committed to reducing them by at least 40 percent by 2030, which is very ambitious, also considering Iceland already has very low emissions compared to other countries. What role can your ministry play in achieving these goals? What financial instruments are you putting in place to encourage the decarbonization?
We have a number of tools in our toolbox. To begin with, we have used the tax system, introducing a carbon tax a few years back, which has been recently increased. Lately we introduced green incentives so that anyone who is doing investments can get a quick amortization of that particular investment; and further adding a 15 percent surcharge on the purchase price of green assets that can be depreciated (charged) against taxable income.
The goal is to encourage investment with emphasis on environmentally friendly investment and green transformation within companies. Although this will leave money behind for the companies, it’s not money lost for the state because, at the end of the day, that tax base will create revenue for the treasury. We are kind of moving money from one time to another and saying: go now and invest, we will give you a tax break, but you will pay it back later.
We’ve also introduced an action plan on reducing emissions which stretches throughout all of the economy. It has to do with public procurement, it has to do with land use, planting of trees, it has to do with our agriculture and food production. We are looking at the transportation systems of Iceland; we’re trying to make transport in Iceland greener. We have introduced a huge tax break for those that import electric cars; if you import a fully electric car, you pay no tariffs and there is no VAT. This has resulted in a surge in the importation of electric vehicles, which now make up a significant part of total vehicle imports each year. Whereas this is precisely what we intended, we must keep in mind that it will lead to big revenue problems for the state if we continue forever—as revenue drops, but the need to maintain and further expand our road system remains. Therefore, we’re working on a transformation into a new revenue model under which you would start paying for the usage of your car and, therefore, for the usage of the road system. We are completely transforming the tax revenue basis for transport in Iceland, and it’s been successful, because we have the second highest imports of electric cars in the world. Hybrid cars have become popular, but now we are trying to reduce their part in the equation and further pushing to go full electric.
We have also started a dialogue with the fishery sector of Iceland. We are trying to push that sector into green energy. It will take a while because the big vessels don’t have the technology yet to go fully green. We are in a dialogue with them to make sure that, once the technology is there and they will start with the smaller vessels, and maybe they will run on engines that will use hydrogen, ammonia or any other form of liquid energy, potentially on batteries; but we just want to make sure that, once the technology is there, that the public regulatory framework is not an obstacle. There are a number of ways we are working towards those goals.
As usual, you are at the forefront of innovation for these kinds of technologies worldwide.
We did things back in the days, in the first half of the last century, which now have such a big relevance to the emissions problem. When my parents were growing up in Reykjavik, there was a big black cloud above the city because of the coals that were burnt to heat up the houses. Then we started utilizing geothermal energy and the room I’m sitting in right now is heated by hot water radiators: it’s fully geothermal and so is the rest of Reykjavik.
This was a very clever and dynamic process for the Icelandic economy back in the day, but now it also has this beautiful environmental impact which has a huge relevance. We’ve come a very long way, and today 99 percent of our homes are electrified through either hydraulic or geothermal energy. On top of that, we have a lot of new innovative startup companies—Carbfix being one of them—and many others that are working toward a greener future.
Iceland has encouraged the growth of its R&D sector through a mixture of both direct funding and tax relief. Do you remain committed to supporting R&D, and how do you think this will pay off in the long term to make Iceland more competitive?
I’m happy you bring this up. It’s been a very strong policy issue for me to support R&D. We believe that we need a more resilient economy, and we think it’s absolutely crucial that we do more R&D work in Iceland. We believe that it will, at the end of the day, be paid back many times in comparison to the support we are giving to those companies, because they will grow, and they will grow internationally. We’re already seeing early signs of this success in that the software development sector has been exploding, and we see it in our exported services numbers.
Do you have a final message for the millions of readers of Newsweek magazine across the world?
We’re excited about the opportunities for the future. We have a large young generation in Iceland—the population of Iceland is young. Times are changing, technology is growing exponentially. Within a matter of a few years, when we start moving more into R&D. We’re opening up the borders for foreign specialists and experts outside of the EEA to come and work in Iceland. The untapped potential is enormous, and we haven’t even touched upon sectors, such as the pharmaceutical sector where we got new companies that are growing very rapidly, such as Alvotech. This particular company is planning to launch its IPO from NASDAQ in the second quarter of this year. They are in biopharma. Also fish farming in Iceland is growing very rapidly and is creating a lot of export revenue. I just wanted to touch upon a number of sectors which are exciting and growing. I’m very excited for the future.