Iceland’s freshly formed ruling coalition has unveiled an ambitious agenda to address economic challenges and social issues, including inflation control, energy investments, and a potential referendum on European Union membership negotiations.
The alliance, led by the Social Democrats in partnership with the Liberal Reform Party and the People’s Party, marks a historic milestone as the nation’s first female-led government.
A Pledge for Fiscal Prudence and Social Investment
The coalition agreement centres on budget restraint to combat inflation while expanding social spending. Kristrun Frostadottir, leader of the Social Democrats, has been appointed prime minister. A Yale-educated economist and a newcomer to politics, Frostadottir is tasked with steering the nation through its pressing economic difficulties.
The coalition inherits challenges from the outgoing government, unseated after voters expressed discontent over soaring living costs and housing shortages. The central bank forecasts economic stagnation for the year, with borrowing costs at 8.5% and inflation projected to average 5.9% in 2024.
Main fiscal measures outlined in the coalition’s agreement:
- Budget Stability: Eliminate the deficit through responsible spending cuts and revenue increases.
- Tax Reform:
- Enhance tax collection efficiency.
- Close loopholes and reduce tax exemptions.
- Interest Rate Targets: Introduce stability rules to create conditions conducive to reducing borrowing costs.
Focus on Energy, Infrastructure, and Sustainability
To diversify Iceland’s tourism-reliant economy, the government has committed to boosting energy generation and efficiency, improving infrastructure, and creating sustainable resource policies. These initiatives aim to shield the nation from the economic volatility it has faced in the past.
Key areas of investment:
- Energy Systems: Increase energy production, strengthen transmission networks, and improve energy efficiency.
- Infrastructure: Expand and modernise transport and communication systems to meet growing demands.
- Climate Goals: Achieve carbon neutrality by 2040 through investments in renewable energy and sustainability projects.
A breakdown of energy-related goals:
| Initiative | Details |
|---|---|
| Energy Generation | Build additional renewable energy facilities to meet domestic and export demand. |
| Transmission Improvements | Modernise grids to reduce energy loss and support green energy projects. |
| Energy Transition Support | Provide incentives for energy-efficient industries and households. |
Recognising the strain on public services due to an influx of foreign workers, the coalition has pledged to address healthcare and education gaps by increasing public investment in these sectors.
EU Referendum by 2027
In a move likely to shape Iceland’s long-term economic and political trajectory, the coalition has promised a referendum on resuming EU membership negotiations by 2027. Iceland has been a member of the European Economic Area since 1994, granting access to the EU single market.
However, membership talks initiated in 2009 were halted in 2015 following a government shift.
To guide public discourse on the matter:
- Expert Report: Independent foreign experts will assess the advantages and disadvantages of continuing with the Icelandic krona versus exploring other currency options.
- Public Sentiment: A November poll revealed that 55% of respondents favour holding a referendum on EU membership during the current government term.
Leadership of the “Valkyries”
The coalition’s leadership has been nicknamed the “Valkyries” in reference to Norse mythology, as all three parties are led by women. Kristrun Frostadottir, Thorgerdur Katrin Gunnarsdottir of the Liberal Reform Party, and Inga Saeland of the People’s Party bring a wealth of experience and diverse perspectives to the table.
Key figures in the new government:
- Kristrun Frostadottir (Social Democrats): Prime minister; former economist with expertise in financial markets.
- Thorgerdur Katrin Gunnarsdottir (Liberal Reform): Foreign minister; advocate for EU membership and prudent fiscal policies.
- Inga Saeland (People’s Party): Welfare and housing minister; focused on addressing housing shortages and supporting vulnerable populations.
New Resource Policies for Tourism and Communities
Tourism remains a critical driver of Iceland’s economy, and the coalition plans to introduce a resource fee for tourist access to natural attractions. While the system is finalised, temporary entry fees will be implemented to generate revenue.
Additionally, the coalition aims to:
- Reform Resource Policy: Ensure sustainable utilisation of natural resources and fair distribution of benefits to local communities.
- Constitutional Amendment: Introduce provisions for nationally owned resources to solidify Iceland’s commitment to equitable and sustainable development.
