Government criticised for raising fees as wage talks approach

Jón Bjarki Bentsson, chief economist at Íslandsbanki, says the government is setting a poor example by raising fees in its new budget proposal, mbl.is reports.

The increases exceed the inflation target and could contribute to higher inflation at a sensitive time, he says, pointing to the review of wage agreements expected this autumn.

Jón Bjarki says the bond market has already responded by forecasting higher inflation next year. The inflation premium has risen by just over 0.1 percentage points over the short and medium term.

He says the government should instead have focused on greater cuts to operating expenditure rather than investment plans in order to cool the economy.

Jón Bjarki says it is positive that the government is aiming for a balanced budget. That should always be the guiding principle for the authorities, particularly after substantial deficits in recent years caused by temporary circumstances such as earthquakes, wars and the pandemic.

However, he says it is disappointing that so much of the increased revenue will come through fees, especially charges that will be reflected in the inflation measurement in January.

“The Central Bank and others had already suggested and called for public authorities not to fuel inflation in the coming quarters, and to set a good example by keeping such increases in line with the inflation target,” Jón Bjarki told mbl.is.

He says raising fixed-amount fees generally by 5.2%, with reference to the Central Bank’s inflation forecast, and increasing the mileage charge by nearly 16% is not a good example, particularly while wage agreements are being reviewed.

Jón Bjarki also called for more restraint on the expenditure side and more targeted cuts. Cutting investment is a classic way to curb spending, he says, but the country has a significant infrastructure deficit, making it an unsuitable way to limit government expenditure at present.

He adds that market reactions indicate that higher inflation is being priced in for the coming months, even before the budget proposal was presented.