Iceland

Shaken by the pandemic-induced collapse in tourism, Iceland falls into the middle ranks (rank 22) with regard to economic policies. Its score on this measure represents a decline of 0.6 points relative to 2014.

After years of brisk growth, GDP fell by 6% in 2020, largely due to a 60% collapse in tourism earnings. However, growth rates were expected to recover to robust levels. Pandemic-related spending soared, with a deficit of 9% of GDP in 2020. Debt rose from 60% of GDP in 2018 to 80% in 2020.

Unemployment rates doubled to about 6% in 2020 and 2021, again largely due to the decline in tourism. As this eases, rates are expected to return to around 4%. Real wages have risen by nearly 50% since 2010, but have been eroded by rising prices. The central bank, which lowered interest rates early in the pandemic, has now reversed course in an attempt to counter inflation.

Taxes have hovered between 42% and 45% of GDP, but have left areas including education, healthcare, welfare and environmental protection underfunded. R&D funding is robust, and the country has seen a rising number of small high-tech companies founded in recent years.

With good general outcomes, Iceland performs well (rank 7) with regard to social policies. Its score on this measure has declined by 0.2 points since 2014.

After a long period of underfunding, tertiary institutions have received ample new resources. The country’s PISA scores are a source of concern. Students from immigrant families appear to be well served.

Social transfers to households increased sharply during the first year of the pandemic, but have slipped downward since. Poverty levels are low. Substantial increases in housing costs have put particular pressure on young people in Reykjavik. Pension funds have an assets-to-GDP ratio that is very high in cross-OECD comparison.

Public healthcare spending has substantially increased. Paternal and maternal leave is provided, and women’s labor-market participation rates are very high. The share of immigrants in the population has risen substantially over the last decade, and integration success has improved over time.

Despite a growing focus on the issue of environmental conservation, Iceland receives comparatively low rankings (rank 30) with regard to environmental policies. Its score on this measure is unchanged in comparison to 2014.

The government’s recently adopted climate strategy contains the ambitious goal of making the country carbon-neutral, with a full energy conversion, by 2040. A 55% emissions reduction as compared to 2005 is targeted for 2030. An early focus is on phasing out fossil fuels in the transport sector, and increasing carbon sequestration through afforestation, revegetation and wetlands restoration.

Climate mitigation measures are slated to receive significant new funding, and a general carbon tax already in place will be gradually increased. A high-profile private initiative is seeking to reduce greenhouse gas emissions by restoring wetlands.

The country is active in Arctic-region environmental affairs. Whaling and fishing practices remain sources of serious contention with the EU and other international bodies.

Showing a mixed pattern of strengths and weaknesses, Iceland scores relatively poorly (rank 31) for the quality of its democracy. Its score on this measure has declined by 1.4 points relative to 2014.

Parties receive public and private funding. The established political parties have granted themselves significant budgetary support in recent years, tipping the scales against opponents. Alleged irregularities in the 2021 parliamentary elections led candidates to appeal the election results to the ECHR for the first time in the country’s history.

Civil rights are well protected. Despite robust nondiscrimination laws, some gender and other discrimination persists. Legal certainty is generally robust, though the judicial appointment process has led to a number of recent controversies. Financial corruption is rare, but abuse of office does occur, and links between politicians and banks remain a concern.

A proposed new constitution and voting system were supported by strong majorities in a non-binding public referendum in 2012. However, this was never ratified by parliament. Referenda are called if the president refuses to sign bills. The government has been secretive about releasing potentially compromising information, but is sometimes overturned by an Information Committee.

With a comparatively thinly staffed government office, Iceland falls into the lower-middle ranks (rank 24) with respect to executive capacity. Its score on this measure is unchanged relative to 2014.

The Prime Minister’s Office has relatively minimal sectoral expertise. Ministries have considerable autonomy in drafting policy, but must present proposals to the cabinet before going to the parliament. Long-term strategic planning is often vague, with inconsistent follow-through.

Recently enacted regulations mandate RIAs, with a methodology for assessment approved in early 2017. Consultation with employer and labor associations is traditionally robust. Parliament’s continuing disregard for the results of a 2012 constitutional referendum is viewed by many as undemocratic. A new policy on public digital services is improving digitalization.

The three-party coalition coordinated COVID-19 responses and actions effectively. However, the government did not commission an expert report on the economic and social effects of COVID-19. Ministry monitoring is strong, but oversight of agencies is weak. The Fisheries Directorate has implemented new high-tech methods including the use of drones for monitoring.

With a mixed set of strengths and weaknesses, Iceland falls into the upper-middle ranks (rank 16) in the area of executive accountability. However, its score on this measure has declined by 0.7 points since 2014.

Parliamentarians have limited resources, but sufficient oversight powers. The audit office and ombudsman are independent and well regarded, with audit-office resources now restored to their pre-crash levels. A data-protection authority deals with cases submitted either by public authorities or private individuals.

Despite a generally well-informed public, voter turnout rates have dropped significantly, particularly among young people, in parallel with a decline in policy interest and trust in politicians. The media provides in-depth information on state policy. The government operates an open consultation website that contains policy information, and where citizens can comment.

Parties use a variety of methods to choose their candidates. Economic organizations are skilled and influential, with a small number of other sophisticated interest organizations also holding strong public profiles. A small group of fishing oligarchs is particularly powerful, influencing policy and helping to keep Iceland out of the EU.