Going for Growth - Iceland

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Iceland GDP per capita is among the highest in the OECD, having recently surpassed pre-crisis levels. Growth has been driven by high employment growth and increasing labour force participation, while labour productivity is lagging and competitiveness is declining.

Inequality is among the lowest in the OECD and it has declined since the crisis as the income share of highincome households fell sharply. The gender gap is the lowest in the OECD. The natural environment provides plenty of renewable energy and spectacular tourist attractions. However, tourism is putting pressure on the environment. Pollution and greenhouse gas emissions per capita from transport are among the highest in the OECD. The 2017 Going for Growth priority to strengthen the competition regime has been addressed partly and the remaining reform recommendations are now included in the priority to support entrepreneurship. The government undertook some reforms in other priority areas such as reducing overly long secondary education and lowering the income tax rate for low-income earners.

Stronger productivity growth and higher inclusiveness could be obtained by further removing disincentives from the tax and transfer system, by reducing support to agriculture and by better supporting entrepreneurship. Improving education outcomes would foster skills, productivity and inclusiveness. An economically, environmentally and socially viable tourism strategy would help to maximise the benefits from the tourism boom.

Growth performance, inequality and environment indicators: Iceland A. Growth Average annual growth rates (%) GDP per capita Labour utilisation of which: Labour force participation rate 1

Employment rate Employment coefficient2 Labour productivity of which: Capital deepening Total factor productivity Dependency ratio

C. The gap in GDP per capita has closed 2002-08 3.7 0.2 0.2 0.0 0.0 3.2 0.8 2.4 0.2

2012-18 3.1 1.3 0.8 0.6 0.0 1.7 -0.4 2.1 0.0

Level

Annual variation (percentage points)

2015 25.5 (31.7)*

2013-15 0.7 (0)*

9.8 (7.6)*

-0.2 (0)*

2016 44.4 (10.9)* 1 (0.3)* 0.0

Average of levels 2010-16 46 (11.3)* 1.1 (0.3)* 0.0

Gap to the upper half of OECD countries5 Per cent 5

0

-5

B. Inequality and environment

Gini coefficient3 Share of national disposable income held by the poorest 20%

GHG emissions per capita4 (tonnes of CO2 equivalent) GHG emissions per unit of GDP4 (kg of CO2 equivalent per USD) Share in global GHG emissions4 (%) * OECD simple average (weighted average for emissions data)

-10

-15

-20

GDP per capita GDP per hour worked

-25

Source: Panel A: OECD, Economic Outlook Database; Panel B: OECD, Income Distribution and National Accounts Databases; United Nations Framework Convention on Climate Change (UNFCCC) Database and International Energy Agency (IEA), Energy Database; Panel C: OECD, National Accounts and Productivity Databases.

StatLink 2 https://doi.org/10.1787/888933954971

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Policy indicators: Iceland B. Producer support to agriculture is very high

A. Educational outcomes are low

Percentage of farm receipts,¹ 2017

Average of PISA scores in mathematics, science and reading, 2015 525

60 50

500

40 475 30 450 20

425

400

10

ICELAND

ICELAND

Advanced economies Nordic countries

OECD

EU

0

Source: Panel A: OECD, PISA Database; Panel B: OECD, Producer Support Estimate Database.

StatLink 2 https://doi.org/10.1787/888933955845

Beyond GDP per capita: Iceland A. Inequality is low Gini coefficient, 2016 or last available year¹ ICELAND, 25.5 SVK, 24.1

ZAF, 63.0

Advanced economies median, 29.7

Emerging economies median, 46.2

B. Exposure to fine particulate matter is very low Percentage of population exposed to PM2.5, 20172 % ICELAND

Advanced economies

< 10 μg/m³ 10-35 μg/m³

Emerging economies

> 35 μg/m³

World 0

10

20

30

40

50

60

70

80

90

100

Source: Panel A: OECD, Income Distribution Database, World Bank, World Development Indicators Database and China National Bureau of Statistics; Panel B: OECD, Environment Database.

Note: For the explanation of the sets of indicators above, please go to the metadata annex at the end of this chapter.

StatLink 2 https://doi.org/10.1787/888933956719

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Iceland: Going for Growth 2019 priorities *

Develop an economically, environmentally and socially viable tourism strategy. Tourism has become Iceland’s largest export sector as the number of visitors has quadrupled since 2010. While the tourism boom helped the economy to grow solidly, it starts weighing on the environment and on the society. 

Recommendations: Establish an inter-ministerial tourism strategy focused on making tourism environmentally, socially and economically sustainable. Remove current tax subsidies for tourismrelated activities. Limit the number of visitors to fragile sites and introduce user fees to manage pressure on the environment.

Improve outcomes in education. Performance in the PISA tests has fallen over the past years despite high spending per student. Social and gender equity is high but immigrant students perform relatively poorly. 

Actions taken: The length of secondary education has been reduced.



Recommendations: Strengthen the capacity of municipalities to manage and oversee primary education. Strengthen school accountability for education outcomes. Adjust curricula to improve performance in reading and mathematics. Increase effective teaching time and raise teacher quality in rural areas.

Remove disincentives to work coming from the tax and transfer system. Marginal tax rates are high, especially for low-income workers. Many young people are not in employment, education or training and disability rolls are rising. 

Actions taken: In 2017, the bottom income tax rate was reduced from 22.86% to 22.50%.



Recommendations: Further reduce the duration of unemployment benefits and increase the period of work needed before a worker becomes eligible to receive benefits. Help people to retain attachment to the labour market by tightening eligibility for disability benefits and by providing support for disabled in employment.

Reduce producer support to agriculture. Agricultural support is high by international standards. 

Actions taken: No action taken.



Recommendations: Reduce agricultural support by lowering tariffs and excise duties, abolishing quotas on agricultural products, reducing other forms of producer support and delinking it from production.

Support entrepreneurship. Iceland is less innovative than the Nordic peers. As its small size can constrain entrepreneurship and prevent firms from scaling up, the regulatory environment should be less restrictive and policies should do more to support innovation.

*



Actions taken: No action taken.



Recommendations: Strengthen competition policy by applying the OECD competition toolkit.

Improve access to public procurement and remove restrictions on foreign membership on company boards. Support innovation, in particular by encouraging links between universities and firms. Ease access to funding further.

New policy priorities identified in Going for Growth 2019 (with respect to Going for Growth 2017). No action can be reported for new priorities.