Title page
Contents
Executive summary 9
1. Key policy insights 14
The economy is recovering 16
Monetary policy has been eased in response to the Covid-19 crisis 22
The financial system is considered to be sound but vigilance is warranted 24
Fiscal policy is supporting the economy 27
Policies to increase productivity and employment 34
References 43
2. Fostering innovation for the digital era 45
Iceland has scope to become more innovative and productive 46
Improving R&D support for businesses 50
Encouraging firms to adopt advanced technologies 56
Developing digital government 65
Relevant skills are needed to foster innovation in the digital era 67
Enhancing knowledge transfer to strengthen inovation 75
References 81
3. Addressing climate change 87
Iceland's impact on the world climate 88
The government's climate policies 90
Pricing carbon can help reach climate targets in a cost-efficient manner 91
Easing the transition towards a low-carbon economy 98
Garnering political support for low-carbon policies 102
Low-carbon policies in individual sectors 103
References 109
Table 1. The economy is projected to accelerate 10
Table 1.1. Macroeconomic indicators and projections 18
Table 1.2. Events that could entail major changes to the outlook 18
Table 1.3. Past recommendations and actions taken in monetary, financial and fiscal policies 30
Table 1.4. Potential impact of structural reforms on per capita income 34
Table 1.5. Past recommendations and actions taken to raise competitiveness and skills 40
Table 1.6. Findings and recommendations to foster a strong, resilient and inclusive recovery 42
Table 2.1. Recommendations for fostering innovation for the digital era 80
Table 3.1. Recommendations for a successful transition to a low-carbon economy 108
Figure 1. The economy plunged 10
Figure 2. Border restrictions hit the tourism sector hard 10
Figure 3. Barriers to entry are high 11
Figure 4. Innovation lags behind 12
Figure 5. PISA scores have trended down 12
Figure 6. Carbon emissions exceed the OECD average 12
Figure 1.1. The pandemic hit Iceland mildly 14
Figure 1.2. The economy suffered a large contraction, but policy support helped 15
Figure 1.3. Iceland's economy is highly egalitarian 16
Figure 1.4. The economy is recovering 17
Figure 1.5. The labour market is stabilising 19
Figure 1.6. External positions have weakened 20
Figure 1.7. Services other than tourism are getting more important 21
Figure 1.8. Foreign tourism collapsed, while domestic travel compensated a bit 22
Figure 1.9. Monetary policy remains accommodative 23
Figure 1.10. Households benefitted more than firms from the easing of monetary conditions 25
Figure 1.11. The banking sector appears sound 26
Figure 1.12. Fiscal policy is supporting the economy 28
Figure 1.13. Adjustments will be required to stabilised the debt ratio over the longer run 29
Figure 1.14. Spending quality will improve as public investment is stepped up 30
Figure 1.15. Tax revenues declined 32
Figure 1.16. High marginal tax rates discourage second earners, often women 33
Figure 1.17. Competitiveness has improved but productivity growth is low in some sectors 35
Figure 1.18. Barriers are high for firms to enter the market 36
Figure 1.19. Regulation of professions is stringent 37
Figure 1.20. Basic skills are relatively weak 39
Figure 1.21. Vocational education and training needs strengthening 40
Figure 1.22. Corruption is perceived as low 41
Figure 2.1. Iceland's overall innovation performance compares well internationally 46
Figure 2.2. Innovation foundations are solid but some critical outcomes remain weak 47
Figure 2.3. There is scope to boost productivity 48
Figure 2.4. The contribution of digital-intensive sectors in added value is comparatively low 49
Figure 2.5. Iceland has scope to raise R&D spending 51
Figure 2.6. Support to business R&D is comparatively generous 53
Figure 2.7. Innovative outcomes of smaller firms could improve 54
Figure 2.8. Icelandic firms, especially smaller ones, have scope for greater adoption of digital technologies 56
Figure 2.9. Productivity dispersion remains large 57
Figure 2.10. Investment in intangibles can boost productivity 58
Figure 2.11. Adoption of advanced technologies has much productivity potential 59
Figure 2.12. The regulatory burden on businesses should be eased 60
Figure 2.13. The insolvency framework can be more innovation-friendly 62
Figure 2.14. Bank lending is an important source of financing for smaller firms 63
Figure 2.15. The debt-bias in the Icelandic corporate tax system could be lowered 63
Figure 2.16. E-Government indicators fare well but there is room to improve digital government 66
Figure 2.17. Iceland lags in teachers' ICT preparedness 68
Figure 2.18. Tertiary innovation performance can improve 70
Figure 2.19. The share of international students in tertiary education is low 71
Figure 2.20. Relatively few students graduate in STEM fields 72
Figure 2.21. Participation in lifelong learning remains relative low for some groups 73
Figure 2.22. Managerial skills can improve further 75
Figure 2.23. Collaborative research remains weak 76
Figure 3.1. Iceland relies mostly on renewable energy 88
Figure 3.2. Overall carbon emissions are above the OECD average 89
Figure 3.3. Industry contributes most to carbon emissions 89
Figure 3.4. Iceland wants to reduce carbon emissions by 40% 90
Figure 3.5. Iceland prices carbon above the OECD average 92
Figure 3.6. Fuel consumption and fuel price trajectories 94
Figure 3.7. Iceland spends less on research and development than its Nordic peers 95
Figure 3.8. Public investment in green infrastructure will rise 96
Figure 3.9. The burden of environmental regulation is slightly above the OECD average 98
Figure 3.10. The economic impact of a sizeable carbon tax increase would be small 100
Figure 3.11. Foreign direct investment is constrained 101
Boxes
Box 1.1. Government measures have helped households and firms through the pandemic 15
Box 1.2. Monetary and financial measures to deal with the Covid-19 crisis 24
Box 1.3. Overview on recent tax reforms 31
Box 1.4. Quantifying fiscal policy recommendations 33
Box 1.5. Quantification of structural reforms 34
Box 1.6. The Danish university funding reform 39
Box 2.1. Iceland's Innovation Policy: main features 50
Box 2.2. Digitalisation and productivity: some empirical findings 57
Box 2.3. Allowance for corporate equity: international experience 64
Box 2.4. Crowdfunding: a potential financing tool for young innovative firms 65
Box 2.5. Policies to foster teacher ICT skills: some international practices 69
Box 2.6. Tertiary education: main features 70
Box 2.7. Financial incentives to boost participation in lifelong learning: international experience 74
Box 2.8. Connecting businesses with researchers: international practices 78
Box 3.1. Determining credible carbon price trajectories: country experiences 93
Box 3.2. What level should an Icelandic carbon tax reach? 94
Box 3.3. Evaluating costs and benefits of carbon abatement 96
Box 3.4. Carbon pricing and economic performance: a summary of recent OECD research 99
Box 3.5. What impact does a carbon tax rise have on the Icelandic economy? 100
Box 3.6. Redistributing the proceeds of a carbon tax: the Swiss approach 102
Box 3.7. Carbon taxation in Iceland's fisheries industry: an impact assessment 104
Box 3.8. Declining fuel tax revenues: the case of Slovenia 105
Box 3.9. New Zealand's plan to price agricultural carbon emissions 107