Prolonged period of fiscal deficits comes to an end in the Budget bill

“The Treasury has run a deficit for eight consecutive years. We have now turned that deficit into a surplus and placed public finances on a firmer footing. This has been made possible by limiting spending growth, streamlining government operations, and prioritising funding for welfare and essential services. A balanced budget is not an end in itself; it is a prerequisite for lowering inflation and interest burdens, while ensuring that the government can continue to provide vital services in the future,” says Daði Már.

Targeted measures create room for priorities

Austerity measures totalling ISK 44.2 billion will be implemented to improve operational efficiency across the government. These include general spending restraint, a reduction in the number of full-time equivalent (FTE) positions, more cost-effective public procurement, streamlined administration, and the consolidation of government agencies.

Spending restraint requirements will be applied according to the nature of each organization’s operations, the need to protect essential services, and the scope for efficiency gains. Consequently, healthcare and elderly-care institutions, schools, courts, and law-enforcement agencies will face less stringent requirements, helping to protect day-to-day public services.

Alongside these efficiency measures, ISK 28.8 billion will be allocated to new initiatives. Key priorities include:

• Healthcare and welfare: Additional funding for new nursing home places, stronger healthcare institutions, and shorter waiting lists. Support for children with complex needs will also be increased.
• Enhanced financial support: The general income exemption for old-age pensioners will be raised, and wage-related unemployment benefits will be improved.
• Education: Higher education will be strengthened, with additional funding for educational materials and STEM initiatives.
• Public safety and infrastructure: Contributions to the road network and rural public transport will be increased. Investments will also be made in law enforcement, defence, the prison system, and secure care facilities.

Revenue measures support a balanced budget

The bill introduces revenue-side measures to achieve balanced public finances. According to the Minister, these changes are unavoidable following cumulative deficits of ISK 866 billion in recent years, ensuring this burden is no longer passed on to future generations. The revenue measures are designed to ensure that the burden is shared fairly, with those best able to contribute bearing a larger share. Emphasis will also be placed on improving tax compliance, closing loopholes, and reducing exemptions.

Revenue-side measures and adjustments are expected to generate approximately ISK 34 billion for the Treasury in 2027. Key measures include an increase in the bank levy and higher charges for tourists.

Stability supports households and businesses

Improving the fiscal balance reduces Treasury borrowing needs compared with previous forecasts, contributing to a lower debt-to-GDP ratio and reduced future interest expenses. This creates greater capacity to maintain robust public services, invest in infrastructure, and absorb unexpected economic shocks.

Treasury debt is projected to stand at approximately ISK 2,100 billion by the end of 2027, equivalent to just under 38% of GDP. The Government aims to reduce the debt ratio in accordance with its medium-term fiscal plan. This will reduce the state’s interest costs and create lasting fiscal space for investments in infrastructure and welfare services.

“Icelandic households have shown remarkable resilience in recent years. Our economic fundamentals are sound, but we know that inflation and high interest rates take a toll on households and businesses. By eliminating the deficit, the Government is doing its part in the fight against inflation. At the same time, we are laying the foundations for a more resilient economy, stronger public services, and greater capacity to invest in critical projects. Responsible public finances are an essential foundation for improved living standards,” says Daði Már.