OECD Economic Survey of Iceland 2021 - Presentation

2021 OECD ECONOMIC SURVEY OF ICELAND Policies for a sound recovery and sustainable growth 7 July 2021

http://www.oecd.org/economy/iceland-economic-snapshot/

@OECDeconomy

@OECD

Key messages •

•

The economy was severely hit following the collapse of foreign tourism but is recovering. Policy action helped support business and household income.

Fiscal consolidation should start as planned once the recovery is firmly on its way.

•

Reducing barriers to competition and foreign direct investment, and strengthening education quality at all levels, will help boost productivity.

•

Better-targeted support for business R&D, a wider adoption of digital technologies and stronger business-university collaboration and knowledge transfer will help Iceland tap innovation potential.

Establishing a consistent climate policy framework based on carbon pricing and investment in low-carbon technology will help Iceland reach its climate targets in a cost-efficient and inclusive way.

•

2

The pandemic hit the economy hard GDP decline, 2020

% 0 -2 -4 -6 -8

NOR

LTU

NZL

EST

FIN

POL

CHE

DNK

USA

LVA

NLD

SVK

OECD

HUN

DEU

CAN

SVN

CZE

BEL

AUT

ISL

PRT

FRA

GRC

ITA

GBR

-12

ESP

-10

Source: OECD, National Accounts database.

3

Tourism collapsed Tourism

Persons

Tourism's direct contribution to GDP (%)

3 500 000

Total number of passengers

% of GDP 9 8

3 000 000

7

2 500 000

6

2 000 000

5

1 500 000

4 3

1 000 000

2

500 000

1

0

0

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Note: Passengers who go through security at Keflavík Airport.

Source: Statistics Iceland.

4

Policy supported household and business incomes Discretionary fiscal measures, 2020-21 % of 2020 GDP 30 25

20 15 10 5 0

USA NZL GBR SGP JPN CAN DEU ISL ITA BEL FRA ESP CHE CZE DNK NLD SWE NOR FIN

Source: IMF, Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic.

5

The economy is recovering 2017

2018

2019

2020

2021

2022

Projections

Current prices (ISK billion)

Percentage changes, volume (2015 prices)

GDP at market prices

2 642.0

4.7

2.6

- 6.6

2.8

4.7

Private consumption

1 323.5

4.8

1.9

- 3.3

2.1

4.9

575.2

1.2

- 3.7

- 6.8

8.0

3.4

Total domestic demand

2 523.5

4.2

0.3

- 1.3

3.4

3.5

Exports of goods and services

1 208.2

1.7

- 4.6

- 30.5

6.5

12.0

_

3.1

3.9

6.4

8.0

7.6

Investment

Unemployment rate (% of labour force)

Source: OECD Economic Outlook No. 109 database.

6

Unemployment is declining again Unemployment rate % of labour force, s.a.

10 9 8 7 6 5 4 3 2 1 0

2004

2006

Source: Statistics Iceland.

2008

2010

2012

2014

2016

2018

2021Q1 2020

7

Inflation has risen

Inflation Y-o-y % change 8

Inflation (y-o-y)

7

Inflation target

6 5 4 3 2 1 0 2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Source: OECD Economic Outlook No. 109 database.

8

Ageing could raise debt to unsustainable levels

% of GDP 120 100 80 60 Historic Business as usual scenario Ageing cost scenario Ageing cost plus policy reform scenario

40 20 0

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Note: Debt projections until 2026 follow the fiscal plan as published in March 2021.

Source: OECD Economic Outlook database No. 109; and OECD calculations.

9

Recommendations to improve monetary, financial and fiscal policies

• Keep monetary policy accommodative, but stand ready to tighten further if long-term inflation expectations risk becoming unanchored.

• Remain vigilant to maintain a sound and resilient financial system.

• Continue supporting the economy and start fiscal consolidation as planned once the recovery is firmly established.

10

RAISING PRODUCTIVITY AND EMPLOYMENT

11

Barriers to enter the market are high PMR gap with OECD average Administrative requirements for new firms Barriers in network sectors Barriers in services sectors Barriers to FDI Licenses and permits Barriers to trade facilitation

Tariff barriers Treatment of foreign suppliers -0.4

-0.2 Less stringent

0

0.2

0.4

0.6

0.8 1 More stringent

Source: OECD, Product Market Regulation Indicators.

12

Foreign direct investment is low and declining % of GDP 8

Total FDI inflows Share of GDP, average 2017-2019

32

6 4 2 0 -2 LUX CHE ISL NOR DNK FRA ITA NZL DEU AUT OECD FIN SWE GRC BEL LTU POL SVN GBR ESP LVA SVK HUN PRT CZE EST NLD IRL

-4 -41

Source: OECD, FDI Statistics.

13

Basic skills are relatively weak PISA scores, 2018 540 520 500 480 460 440

EST

FIN

IRL

POL

SWE

USA

GBR

DNK

NOR

DEU

ESP

SVN

BEL

FRA

PRT

CZE

NLD

AUT

CHE

LVA

ITA

HUN

LTU

ISL

ISR

LUX

SVK

400

GRC

420

Note: Bars reflect the simple average of science, reading and mathematics scores.

Source: OECD, PISA 2018 database.

14

% 100 90 80 70 60 50 40 30 20 10 0

CAN CHL KOR JPN ISL AUS LTU GRC ESP IRL MEX SWE HUN DNK FRA LVA PRT ISR EST OECD GBR TUR DEU NOR ITA BEL POL LUX CHE NLD SVK SVN AUT FIN CZE

Vocational education and training need strengthening

Note: share of VET students in all upper-secondary and lower-tertiary students Source: OECD, Education at a Glance database. For the Czech Republic and Lithuania, data rely on European Center for the Development of Vocational Training (CEDEFOP).

15

The gender gap in hours worked is high

0

Gender gap in hours worked, 2019 or latest

%

-2 -4 -6

-8 -10

ISL

NLD

GBR

AUT

OECD

IRL

DEU

BEL

ITA

CHE

FIN

PRT

DNK

FRA

ESP

LUX

GRC

CZE

NOR

POL

SWE

SVK

EST

SVN

HUN

LVA

-14

LTU

-12

Note: Percentage point difference in hours worked between men and women in full-time dependent employment.

Source: OECD, Labour Force Statistics database.

16

Recommendations to raise productivity and employment • Increase openness by easing restrictions on foreign-owned companies, public procurement and auditing.

• Separate ownership of power generation, transmission and distribution companies, and fully open the wholesale market.

• Improve the compensation structure to attract high quality teachers and reward them for excellence.

• Reduce high marginal tax rates on second earners, e.g. by tapering child and family benefits less.

• Continue the reform of the disability benefit system, putting emphasis on returning to and remaining in work.

17

FOSTERING INNOVATION FOR THE DIGITAL ERA

18

The R&D tax incentive scheme is generous Generosity of R&D tax incentives, 2020

1-B-index² 0.6

Large, profitable firm

SME, profitable firm

0.5 0.4

0.3 0.2

SVK

FRA

PRT

CHL

ESP

LTU

ISL

GRC

IRL

NOR

POL

SVN

CZE

HUN

DEU

NZL

AUT

JPN

BEL

NLD

CAN

GBR

SWE

ITA

AUS

HRV

USA

DNK

TUR

0

MEX

0.1

Note: The tax subsidy rate is calculated as 1 minus the B-index, a measure of the before-tax income needed to break even on USD 1 of R&D outlays (Warda, 2001).

Source: OECD R&D Tax Incentives database. http://oe.cd/rdtax.

19

Smaller firms can be more innovative Share of innovative firms

Note: The enterprise is considered as innovative if during the reference period it introduced successfully a product or process innovation, had ongoing innovation activities, abandoned innovation activities, completed but yet introduced the innovation or was engaged in in-house R&D or R&D contracted out.

Source: Eurostat, the Community Innovation Survey 2018.

EST

NOR

BEL

DEU

ITA

SWE

AUT

GRC

FIN

DNK

ISL

LUX

FRA

NLD

IRL

CHE

SVN

LTU

CZE

TUR

PRT

LVA

ESP

HUN

SVK

Small firms Large firms POL

% 100 90 80 70 60 50 40 30 20 10 0

20

There is room to raise firms’ adoption of digital technologies

E-sales

Customer relationship management (CRM)

Enterprise resource planning (ERP)

Nordics

OECD

ISL

Nordics

OECD

ISL

Large

Nordics

OECD

ISL

Nordics

Small

OECD

100 90 80 70 60 50 40 30 20 10 0

ISL

% of enterprises

Social media

Note: "Nordics" refers to the simple average of the latest values for Denmark, Finland, Iceland, Norway and Sweden. “Small" stands for enterprises with 10-49 employees, "Medium" for enterprises with 50-249 employees and “Large” for enterprises with 250 employees and over.

Source: OECD, ICT Access and Usage by Businesses database.

21

Iceland lags in teachers’ ICT preparedness % 100

OECD average

Iceland

90 80 70 60

OECD average Iceland

Iceland OECD average

50

OECD minimum

Iceland OECD average Iceland

OECD average

OECD maximum

% 100 90

Iceland OECD average

40

70 60

OECD average Iceland

30

80

OECD average

50

Iceland

40 30

20

20

10

10

0

Number of digital School’s Internet Number of digital Digital devices The availability devices connected bandwidth or devices for at the school are of adequate to the Internet instruction sufficiently software speed is sufficient is sufficient powerful in terms is sufficient is sufficient of computing capacity

An effective Teachers have online learning the necessary support technical and platform pedagogical skills is available to integrate digital devices in instruction

0

Source: OECD calculations based on PISA. 22

Business-research collaboration on innovation remains weak Global Innovation Index University/industry research collaboration, 2020 90 80 70

60 50 40 30 20 0

GRC SVK POL TUR ESP CHL HUN EST SVN LVA ITA AUS LTU PRT KOR OECD FRA ISL NZL NOR JPN AUT CAN IRL BEL GBR DNK DEU SWE NLD USA FIN CHE

10

Source: Global Innovation Index, 2020.

23

Recommendations to foster innovation in the digital era • Regularly assess the cost-effectiveness of R&D tax incentives to inform policy choices and further reform.

• Ensure that the new publicly-owned venture capital fund invests in privately-owned venture capital funds with large potential to promote start-ups and innovation companies.

• Accelerate progress towards digital government and a data-driven public sector.

• Increase in-service and pre-service training in ICT for teachers.

• Link university funding partially to the success of tertiary courses in providing skills corresponding to labour market needs.

• Introduce policy initiatives to encourage business-research collaboration on innovation, including specific programmes that connect smaller firms with researchers.

24

ADDRESSING CLIMATE CHANGE

25

Iceland relies more on renewable energy than any other OECD country Non-renewables

Renewables

KOR ISR JPN AUS NLD BEL USA LUX MEX POL SVK CZE FRA HUN OECD IRL GBR GRC DEU ESP TUR CAN SVN ITA CHE PRT LTU EST CHL AUT FIN DNK SWE NZL LVA NOR ISL

% 100 90 80 70 60 50 40 30 20 10 0

Note: Total primary energy supply (TPES) is made up of production + imports - exports - international marine bunkers - international aviation bunkers ± stock changes.

Source: OECD Environment at a Glance database.

26

Total greenhouse gas emissions are above-average Iceland

Kg per capita

OECD

20 15

10 5 0

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Source: OECD Green Growth Indicators.

27

Industry contributes most to greenhouse gas emissions Greenhouse gas emissions by source, 2018 % 60

Iceland

OECD

50 40 30

20 10 0

Transport

Energy

Industrial processes and product use

Agriculture

Waste

Source: OECD Environment Statistics database.

28

Different economic sectors underlie different carbon tax levels Effective carbon tax rates

ECR in EUR per tone of CO2

350 Road transport

300

250

Iceland OECD

200

Agriculture and fisheries

150 100

Industry

50 0 0

10

20

30

40

50

60

70

80

90

100

% of CO2 emissions from energy use

Note: the effective carbon tax rate consists of permit prices from the EU ETS, explicit carbon taxes on fossil fuels and specific taxes on energy.

Source: OECD, Effective Carbon Rates 2021, https://doi.org/10.1787/0e8e24f5-en.

29

Recommendations to foster costefficient and inclusive climate action • Carry out comprehensive cost-benefit analysis of planned climate actions, using a common carbon shadow price.

• Participate in international carbon abatement, to reduce the cost of emission cuts and to foster technology transfer.

• Commit to a gradual phase-in of higher carbon prices for sectors not covered by the EU emissions trading scheme, consistent with reaching climate targets.

• Cut agricultural subsidies and couple the remaining ones to sustainable land management and less carbon-intensive production.

• Increase research and development in carbon capture technologies, clean vessel propulsion and soil conservation, including by stepping up international and university-business cooperation in these areas.

30

For more information Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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