Government weighs extending fuel VAT cut

Prime Minister Kristrún Frostadóttir says the government is considering extending a temporary reduction in the value-added tax rate on fuel, mbl.is reports. She said other measures were also being considered and that the government was consulting with labour-market representatives to preserve industrial relations.

Frostadóttir made the remarks after a cabinet meeting on Friday morning. She described the Central Bank’s interest-rate increase as disappointing but rejected criticism that the public sector was driving inflation, despite planned tax increases in the upcoming budget.

She said public revenues and spending were developing in a responsible manner and that government spending as a share of gross domestic product was not expanding. Changes to fees and charges were also necessary, she said, because the state had to fund services, some of them required by law.

Frostadóttir acknowledged that the government may have been too optimistic about inflation after it fell below 4 per cent toward the end of the previous parliamentary term. She said the government had believed inflation expectations were becoming better anchored last December, but that external factors, including conflict in the Persian Gulf, had also played a role.

She said the government’s immediate task was to restore public confidence in its efforts to control inflation. The most important measure would be a balanced budget this autumn, she said.

Asked about extending the fuel VAT reduction, Frostadóttir said the measure was costly but also affected the consumer price index. The government was therefore assessing whether targeted measures could be introduced that were sensible in terms of costs and spending.