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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