Sigmundur Davíð calls budget confirmation of surrender

Sigmundur Davíð Gunnlaugsson, leader of Miðflokkurinn, says the government budget proposal is deeply disappointing and has little confidence that the budget will be balanced when the year is closed, mbl.is reports.

He said the government was continuing along the same path of raising taxes and fees, which he believes fuels inflation and reduces value creation. Asked to describe the budget proposal in one sentence, he replied: “Confirmation of surrender.”

“I have a very poor opinion of this,” Sigmundur told mbl.is. He said he had expected the government to learn from experience in recent months, but that did not appear to be the case.

“They intend to do more of the same, more of what has held back value creation and job creation while fuelling inflation,” he said.

Calls for greater spending restraint

Sigmundur criticised continued increases in taxes and fees, saying they would feed directly into prices. He specifically mentioned the bank tax, arguing that the cost would ultimately fall on bank customers and could even put upward pressure on interest rates.

“All of this is aimed at making a situation that is not good even worse,” he said.

In his view, the government should have shown greater restraint in public spending and aimed to deliver a balanced budget without extensive tax increases. He said such an approach could increase the authorities’ credibility, help reduce inflation expectations and create room for more investment and value creation.

“This approach will not work, and I think no one really expects the budget to be balanced when the year is closed next year,” Sigmundur said.

He said this was particularly unfortunate as negotiations on renewing collective agreements were approaching, because expectations of continued inflation could affect both prices and wage demands.

Says revenue estimates are too optimistic

Sigmundur also believes the government is underestimating the impact of tax increases on consumption and, consequently, on the tax revenue actually reaching the treasury.

“It does not appear to be taken into account that increased taxation and higher fees are likely to reduce consumption, including in the tourism industry, which is highly sensitive to global competition,” he said.

It was not possible, he argued, to assume that a tax increase would produce the same amount of additional revenue.

“You cannot simply raise taxes and count all of that as revenue, because there will be fewer transactions and fewer purchases, and therefore lower tax revenue,” he said.

Sigmundur therefore believes the outcome is likely to be not a balanced budget but a “tax increase budget” that nevertheless runs a deficit. He said that could maintain high inflation expectations as the country enters collective bargaining negotiations.