Nobody Likes A Balanced Budget

In the coalition’s first few days of government, Minister of Finance Bjarni Benediktsson and Prime Minister Sigmundur Davíð Gunnlaugsson proclaimed that the deficit that they’ve inherited—25 billion ISK—is much greater than they had been led to believe it was before the elections. Given their campaign promises to lower taxes, remove capital controls and write off household debt, many have been curious to see what the coalition’s first proposed budget plan would look like. On October 1, Bjarni unveiled said budget, which plans for a 500 million ISK surplus—the first budget in six years that does not assume a growing national deficit. So just how are they going to do it?

A line, drawn

The 2014 budget bill proposes increasing spending by 23%, granting the Ministry of Foreign Affairs an additional 660 million ISK, the Prime Minister’s Office 1.5 billion ISK, and the Ministry of Welfare 17 billion ISK. The police force will get an additional 500 million ISK, and the national church will have their funds increased by 100 million ISK, partly through higher parochial fees.

Those whose wages fall under the middle income tax bracket (225,000 to 700,000 ISK per month) will have their taxes lowered from 25.8% of earnings to 25%. This means that those who are earning 400,000 ISK per month will be taxed 1,140 ISK less each month. Those earning less than 225,000 ISK or more than 700,000 ISK will not get any further tax breaks.

This is the first step in the coalition’s tax reform plans, which will see the progressive national tax rates imposed by the previous government replaced with a flat tax rate by the end of their four-year term.

VAT on select products, such as disposable nappies, will also be lowered from the 25.5% rate to 7%, which will lead to 14–15% lower prices for new parents. Although maternal and paternal leave will not be further extended, the benefits will increase up to a maximum of 390,000 ISK per month.

A line, met

To pay for these increases, the bill proposes further taxing of large financial institutions, including the winding-up boards of the three collapsed banks, estimating that this will generate 11 billion ISK. This will give smaller financial companies space to grow, and shift the tax burden onto the large companies. Up to fifty government institutions will also be combined into other institutions, but these measures will not be enough to cover the proposed increased government spending in 2014.

To cover the remaining 12 billion ISK, the government will employ austerity measures across the board. Amongst the cuts are those being made to the university system, which will now charge an additional 25% in registration fees; the health sector, whose budget will be cut by 1.1 billion ISK, and upper secondary schools, which will have 3.9% less funds, equal to 1.4 billion ISK. Tax on alcohol, tobacco and fuel will also increase, but the budget does not specify by how much.

The Icelandic Film Fund is, proportionally speaking, one of the biggest losers, having 33% of its budget cut, from 1.1 billion to 735 million ISK. The Icelandic Film Makers Association estimates that the cuts to the industry will result in tax losses of 600 million ISK for the government, based on a 2011 study by Dr. Ágúst Einarsson (see page 25 for more information on the Icelandic Film Fund).

No additional funds are allocated to the National Hospital, and the 600 million ISK that the previous government had allocated in the 2013 budget to renew equipment has been recalled. What has sparked the greatest debate has been the budget’s plan to charge patients 1,200 ISK per overnight hospital stay, which would generate 200 million ISK annually. Numerous organisations, including the Organisation of Disabled in Iceland, have condemned this proposition.

The Financial Service Authority (FME) stands to have its budget reduced by 13%, or 236 million ISK, despite the fact that the Parliamentary Special Investigative Committee partly blamed the banking collapse on poor regulation by under-resourced supervisory institutions. The Office of the Special Prosecutor, responsible for investigating financial crimes, also faces cuts amounting to 45%, or 700 million ISK, as it will have concluded its investigations by 2014.

A line, broken

The Teacher’s Union (KÍ), the Federation of State and Municipal Employees (BSRB), Union of Public Servants (SFR), Icelandic Confederation of Labour (ASÍ), and other unions have voiced several objections to the budget, with ASÍ president Gylfi Arnbjörnsson disappointed that healthcare matters get glossed over to lower taxes for the better off.

During Sigmundur Davíð’s speech at the inauguration of the autumn parliamentary session on October 2, he said people were overreacting, as the proposed bill was only a draft. Bjarni Benediktsson followed by highlighting the importance of having a strong bill that stopped the State’s growing debt by balancing the budget, and providing families and businesses with an economic plan that they can depend on.

During these speeches, three hundred people protested outside parliament, chanting anti-government slogans, claiming it was unethical in cutting services to the poor and sick while lowering the fisheries fees and wealth tax for the rich and privileged. The protesters then burned a copy of the 2014 budget bill.

The budget will have to go through three rounds of debates before being passed, and by all accounts, it appears the opposition and unions will be fighting its present incarnation with tooth and nail. The coalition doesn’t seem opposed to making changes, especially to the hospital admission fees, perhaps marking the beginnings of a government willing to cooperate with its opposition.

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Reactions To The Budget
Bjarni Benediktsson, Minister of Finance and chair of the Independence Party

“We introduce specific austerity measures […] and we create the flexibility to lower the personal income tax percentage, lower public insurance fees, and nevertheless balancing the budget. This doesn’t happen by itself, but it is realistic and necessary.”
— Bjarni on the success of the 2014 budget.

(RÚV radio interview, October 1)

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Eygló Harðardóttir, MP for The Progressive Party and Minister of Social Affairs

“The changes made to the reduction rate on wages earned by the elderly and disabled will greatly improve their standard of life.”

— Eygló on the budget delivering her party’s campaign promise of improving the lives of the elderly and disabled.

(Morgunblaðið, October 2)

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Björn Zoëga, outgoing executive director of the National Hospital

“If the budget is not changed, it will be very difficult to run the hospital in a safe way. I will not be a part of driving the hospital off the cliff.”

— Björn on the delicate financial situation of the National Hospital. Björn resigned from his position a week before the budget was released.

(Kastljós, September 27)

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Árni Páll Árnason, chair of the Social Democratic Alliance

“The situation is such that people are not admitted to the National Hospital unless they are very ill, and they are often in a state of hardly being able to stand up when they are discharged.”

— Árni on why the new hospital admission fees will mostly come down on the chronically ill.

(RÚV, October 1)

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Vigdís Hauksdóttir, MP for The Progressive Party and Chair of the budget committee

“‘Immediately’ is perhaps a flexible term when you are dealing with a big issue like the National Hospital.”

— Vigdís explains her party’s campaign promise to give the National Hospital 11–13 billion ISK “immediately” to improve its service, suggesting that those funds would find their way to the hospital sometime in the four-year term.

(Kastljós, October 3)

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Katrín Jakobsdóttir, Chair of the Left-Green Movement party

“Investment that had been planned in the last government’s investment schedule, including investments in the public sector, construction, university research, and the creative sectors, are being retracted”

— Katrín highlights her disappointment with the withdrawal of investments approved in the 2013 budget by all parties, including the ones currently in government.

(RÚV, October 1)

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Baltasar Kormákur, filmmaker

“It is almost impossible to build any future for the Icelandic films when they keep cutting us down at the knees.”

— Baltasar on the heavy cuts to the Icelandic Film Fund.

(Hollywood Reporter, October 4)

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Guðmundur Steingrímsson, Chair of the Bright Future party

“The budget lacks vision, and sustainability. It suggests gathering revenue from unsustainable resources, such as the bank’s winding-up boards […] and that revenue is not used to invest, or build a new National Hospital, which would pay off in the long term, but to lower another permanent source of revenue, which is the income tax. It sounds off, to be harvesting an unsustainable resource, and using it to lower a sustainable resource.”

— Guðmundur’s first reactions to the budget.

(Kastljós, October 1)