Iceland’s government expects to balance its budget two years ahead of earlier plan, following similar advice to cool the island’s economy by organizations including the International Monetary Fund and the OECD.
(Bloomberg) — Iceland’s government expects to balance its budget two years ahead of earlier plan, following similar advice to cool the island’s economy by organizations including the International Monetary Fund and the OECD.
The north Atlantic island has undergone western Europe’s most aggressive interest rate hiking campaign since May 2021 to rein in stubbornly high inflation, with a surprise half-point increase last week to 9.25%. Governor Asgeir Jonsson has cited lack of fiscal policy support among factors working against his aims, along with robust tourism and export, and bigger-than-expected wage hikes.
The cabinet in Reykjavik now aims to achieve overall fiscal balance by 2025, after state finances have developed better than expected, Finance Minister Bjarni Benediktsson said in an interview on Friday after presenting budget measures at a news conference. The government previously targeted general government fiscal balance by 2027.
Read More: Iceland to Cut Spending, Boost Housing Supply to Slow Inflation
The minister also shrugged off central bank’s criticism, saying price stability isn’t the “main goal” of state finances. A 200 billion kronur ($1.5 billion) improvement in the budget balance versus projections two years ago “shows that the state finances have not been working against the central bank,” he said.
“I think the central bank needs to communicate better that they believe in the interest rate tool,” Benediktsson said. “After having hiked rates 14 times it strikes me that the bank claims to be alone in this task. We are not using the state finances specifically to hold back inflation. We have other goals.”
Still, Benediktsson added inflation expectations are “still high” and underlying inflation “considerable.”
Rate increases have recently focused on preventing a spiral of growing wages and prices, and employment contracts are set to be renegotiated this fall, adding urgency to central bank’s efforts. Jonsson left the way open last week for the key rate to go past 10% if needed but said the likelihood of that was “maybe lower” than when he first raised the possibility in May.
“I share the concern for the wage development and the tension we have in the economy,” Benediktsson said. “But the situation can be managed and a soft landing is possible as long as the labor market participants acknowledge that prior wage hikes have already exceeded increased productivity.”
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