Icelandic state must lead in limiting price rises

In a contributed article published by Morgunblaðið, Guðrún Hafsteinsdóttir argues that the state must lead by example in limiting price increases, as inflation and high interest rates continue to squeeze households and businesses.

The government of Kristrún Frostadóttir was elected on promises to get the economy, inflation and interest rates under control. Many voters, perhaps most, ultimately vote with their wallets, Hafsteinsdóttir writes.

The government’s first task was supposed to be stabilising the economy and lowering interest rates through firm control of state finances. The prime minister said that if more needed to be done, and done faster, the government would do more, faster. “Actions speak louder than words,” she said.

Inflation is now 5.9%, more than one percentage point higher than when the government took office. It has not been this high since August 2024. The government is contributing to the rise, Hafsteinsdóttir says, through tax and fee increases that affect households and businesses. Some also directly affect the consumer price index: Statistics Iceland says the index rose by 0.32% because a temporary reduction in value-added tax on fuel expired in early September.

The government has now announced tighter control of state spending, which Hafsteinsdóttir welcomes. But households and businesses have waited a long time for the promised fall in inflation, at considerable cost. Each month of high interest rates and rising living costs puts more pressure on family finances and limits businesses’ ability to invest and create jobs.

Balancing the state budget and stopping the accumulation of debt are important, she writes, but so is how those goals are achieved. The government has announced spending restraint as well as extensive tax and fee increases, on top of those already imposed on households and businesses.

Next year’s draft budget proposes a 5.2% increase in fixed-amount duties, including duties on alcohol, tobacco and nicotine. The mileage charge is also set to rise further. These increases affect households and raise business operating costs.

The government is proposing the increases while calling on public bodies and businesses to limit price rises to 2.5%, in line with the Central Bank’s inflation target. Businesses and municipalities have accepted that challenge, Hafsteinsdóttir says.

Árborg and Kópavogur, both led by Independence Party members, have taken the initiative. Árborg has decided to limit general fee increases to 2.5% next year. Kópavogur has said it is willing to apply the same limit to fees affecting families with children, provided collective agreements hold and other public bodies take part.

The national congress of the Association of Icelandic Municipalities has also approved a resolution by Almar Guðmundsson, mayor of Garðabær and the association’s chairman, calling for general fee increases to remain within 2.5% in 2027 and for the state to participate on similar terms.

The state cannot exempt itself while charging others more, citing general price rises and the need to preserve the value of tax bases, Hafsteinsdóttir writes. Economic policy is the government’s responsibility, not that of individuals and businesses, so the state should lead by example. She adds that the Independence Party’s parliamentary group intends to do its part.