Iceland 2015 stability and productivity Reykjavik 1 September

1. www.oecd.org/eco/surveys/economic-survey-iceland.htm
OECD
OECD Economics
2015 OECD ECONOMIC
SURVEY OF ICELAND
Stability and productivity
Reykjavik, 1 September 2015

2. Thanks to:
• A substantial depreciation of the krona.
• The tourism boom.
• Higher consumer income and lower debts.
2
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. 3
How’s life in Iceland?
Good overall
0
1
2
3
4
5
6
7
8
9
10
Income and wealth
Jobs
Housing
Work-life balance
Health
EducationCommunity
Civic engagement
Environment
Safety
Life satisfaction
Iceland OECD

4. 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
SVN
ESP
AUS
DEU
AUT
CZE
GBR
SVK
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. 5
Lifting capital controls,
while preserving stability

6. 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.
7
How to lift capital controls?

8. 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.
11 12 13 14 15 16
Real wages
s
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. Inflation
Y-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.
9
How to enhance economic stability?

10. 10
The budget deficit has been eliminated
Source: OECD, Economic Outlook 97 database
% of GDP
General government net lending

11. 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 debt
Scenario 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.
12
How to ensure fiscal sustainability?

13. How to revive productivity?
13

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 (%)
14
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
15
And productivity is relatively low
Labour productivity (average 2009-2013)
Source: OECD, Analytical and Economic Outlook databases; Labour Force Statistics and Productivity databases

16. 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. 17
Especially regulatory and legal barriers
0
1
2
3
4
5
0
1
2
3
4
5
Licences and permits
system
Rules and procedures²
Administrative burdens on
startups
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. 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
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
90
100
ITA
TUR
CHL
MEX
PRT
SVK
CZE
AUT
HUN
POL
GRC
SVN
DEU
FRA
ESP
OECD
NLD
DNK
ISL
BEL
SWE
CHE
EST
NOR
LUX
FIN
IRL
NZL
GBR
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
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
90
100
KOR
JPN
IRL
SVK
ISR
USA
GRC
HUN
EST
POL
SVN
CAN
SWE
TUR
OECD
AUT
BEL
FIN
NZL
GBR
ITA
CHL
MEX
NLD
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
19
Adopt a productivity-friendly agenda

20. More Information…
www.oecd.org/eco/surveys/economic-survey-iceland.htm
OECD
OECD Economics
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