Higher fees likely to fuel inflation, economist warns

Higher taxes and fees included in Iceland’s proposed 2027 budget are likely to push up inflation, Una Jónsdóttir, chief economist at Landsbankinn, told mbl.is.

Various taxes and charges are set to rise by 5.2% next year, in line with the assumptions in the budget bill presented by the finance minister on Monday. The budget forecasts a balanced operation and a surplus of several billion Icelandic krónur.

“It is unfortunate to see such large fee increases being introduced, and this will probably show up in inflation figures around the turn of the year,” Jónsdóttir said.

She said the budget was disappointing at first glance from an inflation perspective. The increases are based on a forecast that inflation will reach 5.2% around the turn of the year, while the inflation target is 2.5%.

“If we always have built-in increases that exceed what is consistent with the inflation target, it becomes extremely difficult to bring inflation down properly,” Jónsdóttir said.

How long inflation lasts will depend partly on government spending and fiscal restraint, she said. It remains to be seen whether measures to curb spending will be sufficient to counter the increases and reduce overheating in the economy.

“The balanced budget is being achieved partly by increasing fees, so we will see measured inflation rise somewhat. Those are at least the short-term effects,” Jónsdóttir said.