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The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic survey of Iceland, published on 28 February 2008.
Following significant structural reforms and foreign direct investment projects, the Icelandic economy enjoyed several years of rapid expansion, which entailed major internal and external imbalances. While growth has slowed and imbalances have diminished, the adjustment process has been uneven, with wage developments, improving financial conditions and government measures rekindling demand and inflation pressures during the course of 2007. The economy is quite flexible and resilient but remains vulnerable to changes in foreign-investor sentiment, as evidenced by the recent volatility in the exchange rate and share prices. Thus, the key challenge for policy in the near term is to restore macroeconomic stability by ensuring that steady progress is made in unwinding imbalances. Additionally, steps need to be taken to strengthen the ability of both monetary and fiscal policy to moderate economic volatility and prevent the re emergence of major imbalances with a view to sustaining Iceland’s favourable growth performance. In a longer term perspective, there will be many spending pressures and a key challenge for policymakers will be health-care reform. Although the overall fiscal position is favourable, health care (which is largely government-financed) is a major source of public spending pressures. Health outcomes are very good, but the system is costly, suggesting that there is room for enhancing cost effectiveness. The major issues addressed in this Survey are thus:
Swiftly restoring economic balance
Make it perfectly clear that the Central Bank would not hesitate to tighten the monetary stance further if this is necessary to anchor inflation expectations at the official target. In order to support the credibility and the effectiveness of monetary policy, it would be helpful if members of government respected the independence of Central Bank policymaking.
As long as excess demand and inflation pressures persist, avoid expansionary fiscal measures. Likewise, to the extent possible, phase in gradually new major energy intensive investments, which, in any case, must not proceed without prior evaluation within a transparent, broad cost-benefit framework (including environmental impacts).
Strengthening the macroeconomic policy framework
After inflation has stabilised, further strengthen the “frame budgeting approach” by adopting binding nominal multi year spending ceilings consistent with the inflation target. Introduce similar fiscal rules for local governments, including spending limits. This would increase the contribution of fiscal policy to macroeconomic stabilisation and enhance public ownership of the inflation target.
Once inflation has been durably brought down to the target, refinements to the inflation targeting framework could be considered (such as adjustments to the target variable).
Reform the publicly owned Housing Financing Fund (HFF), which not only distorts resource allocation but also undermines the effectiveness of monetary policy and contributes to economic imbalances. At a minimum, charge the HFF a fee reflecting the benefit of its government guarantee. Morever, it is recommended that its social functions and wholesale market operations be split up, with targeted transfers addressing the social objectives.
Improving cost effectiveness in the health-care sector
Facilitate private provision, which accounts for only one quarter of publicly financed health services, and open up the sector to competition, thereby enhancing efficiency and broadening patient choice. Consider more reliance on co payments so as to avoid a situation in which competition among providers in a context of no, or very low, cost sharing leads to overconsumption of medical services. These measures would also relieve pressure on public finances.
Strengthen the government’s role as a buyer of health services, establishing ceilings on public spending, speeding up cost efficiency analysis of major services and introducing activity based funding arrangements.
Further reduce the reliance on, and increase the efficiency of, costly hospital care and take measures to reduce the high cost of pharmaceuticals by promoting the use of generic drugs.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Iceland 2008 is available from:
For further information please contact the Iceland Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Hannes Suppanz and Andrea de Michelis under the supervision of Patrick Lenain. Research assistance was provided by Ane Kathrine Christensen.