Government cuts road funding despite infrastructure promises

Funding for Iceland’s road administration will fall by 6% next year, according to a summary by mbl.is of figures compiled by Viðskiptaráð, the business council, from the budget bill presented by Daði Már Kristófersson. The government plans to run the state treasury without a deficit.

Economist Ragnar Sigurður Kristjánsson of Viðskiptaráð said funding would drop from nearly 56 billion Icelandic krónur to 52.3 billion, a year-on-year reduction of almost 3.7 billion.

The bill proposes a 19% increase in unemployment benefits. Ragnar said this indicated that unemployment was expected to rise next year, resulting in higher spending from the fund.

Spending on medicines and medical services will increase by 11%, while old-age and disability pensions will rise by 10%. The state’s interest costs will increase by 5%, operating costs for Landspítali, Iceland’s national university hospital, will rise by 7%, and spending on nursing places will increase by 13%.

Contributions to the Equalisation Fund of Municipalities will increase by 17%, while operating costs for the University of Iceland will rise by 3%. Expenditure on pension payments to state employees will fall by 2%. Ragnar said people had already accumulated entitlements within the new system.

State revenues are forecast at just over 1,708 billion krónur, while expenditure is expected to be just under 1,704 billion. If the estimates hold, the treasury will record a surplus of about 5 billion.

According to the bill, expenditure will increase by 83 billion from the approved 2026 budget. That increase is equivalent to the lifetime tax payments of 605 individuals. Spending under ministerial policy areas, excluding the highest levels of state administration and interest costs, will rise by 73 billion.

Spending increases vary between ministries, with the Ministry of Environment, Energy and Climate the only one where expenditure will fall year on year. The largest proportional increase will be at the Ministry of Social Affairs and Housing, the second-largest ministry by expenditure. Its spending will rise by about 9%, mainly because of higher costs for disability and old-age pensions, unemployment insurance and parental leave.

The second-largest increase will be at the Ministry for Foreign Affairs, where expenditure will rise by about 8%, primarily because of increased defence spending.

The reduction in road funding is notable because the government promised last year, during the dispute over fishing fees, that the money would be used to build infrastructure.

Prime Minister Kristrún Frostadóttir said on 19 May 2025 that the government wanted to channel more resource rent into public infrastructure, mentioning roads and healthcare. At the first reading of the fishing-fee bill on 5 May 2025, Business Minister Hanna Katrín Friðriksson said the government’s clear policy was for the additional revenue from the fee adjustment to fund infrastructure in communities across the country, particularly road maintenance, new construction and electricity transmission systems.