The Icelandic Way Out of the Crisis
Welfarism, redistribution and austerity
by
Stefán Ólafsson
Working Paper no. 1: 2012
Þjóðmálastofnun – Social Research Centre,
University of Iceland
1
Executive summary
Iceland worked out its own policy to deal with the crisis, in cooperation with the IMF. Iceland graduated
from the IMF program earlier this year. Iceland already has started to pay back the crisis loans it
received from IMF and the other Nordic nations, earlier than required by the loan agreements. Iceland
seems now to be firmly on a dynamic resurrection course, with economic growth having been 3.1% in
2011 and prospects are of a 2-3% growth in 2012. Real wages have increased significantly and so has
private consumption. Unemployment was generally well below the EU average through most of the
crisis and is presently on a slow downward path. So the economic winds have already changed in
Iceland, in fact earlier and more forcefully than in many of the other countries that were deeply hit by the
financial crisis.
The main characteristics of Iceland’s approach are an emphasis on redistribution, through the tax
system and the social protection system, along with debt relief measures that also were
disproportionally aimed at the middle and lower income groups. Redistribution meant that need for
expenditure cuts, classic austerity measures, were not as great as otherwise would have been. Various
efforts to alleviate unemployment were also implemented. While the national currency (the Icelandic
Krona) had a role in exaggerating the bubble economy effect prior to the crisis, its devaluation helped
export industries maintaining their operation after the collapse. The cost of that devaluation however fell
drastically on households, with a big cut in real earnings (through price inflation while incomes lagged
behind). That cut in living standards fell however disproportionally on higher income households, due to
the policy of redistribution. We see the redistribution policy as supporting a stimulus effect by keeping up
consumer demand to some extent, helping to contain unemployment trends and faciliutating economic
recovery from the depression (see also Krugman 2012). The policies have also succeeded in containing
poverty problems and softening financial hardships amongst the most vulnerable.
When comparing Iceland and Ireland we see completely opposite policy effects in distributing the
burdens of the crisis, with lower income groups getting much more cuts in real earnings in Ireland than
in Iceland, while the higher income groups were more hit in Iceland. The top income group in Ireland
actually increased its real earnings in the early stages of the crisis. The Irish pattern seems to be similar
to the USA pattern and partly to the UK pattern. Due to the emphasis on redistribution in Iceland the
income distributin became much more egalitarian by end of 2010 than it had been before the crisis
(which actually was associated to great increases of income inequality up to 2007).
We cover debt relief measures significantly in this report, showing the effects of the measures taken.
Debt levels have actually come significantly down by end of 2011, in fact close to the level prevailing in
2007, a year before the financial collapse. Debts have been written down for some 15-20% of
households and debt relief has been greatly expanded through subsidies of interest costs of housing
loans. The government now pays about 35% of the interest cost of housing loans in Iceland and up to
45% for the lowest income groups. That measure is also quite redistributive in its effect on income
distribution.
The following is the IMF recent verdict on Iceland’s policies: „Targeted household debt restructuring
policies can deliver significant benefits. Such policies can, at a relatively low fiscal cost, substantially
mitigate the negative impact of household deleveraging on economic activity. In particular, bold
household debt restructuring programs such as those implemented in the United States in the 1930s
and in Iceland today can reduce the number of household defaults and foreclosures and alleviate debt
repayment burdens. In so doing, these programs help prevent self-reinforcing cycles of declining house
prices and lower aggregate demand“.
Recent policies in 2012 have primarily seen fine-tuning of policies already in place, but with a growing
emphasis on job creation. The government recently announced a major investment plan to take effect in
2013, with foreseen great positive effects on job creation. Such policies would harness the already fairly
good prospects.
2
Table of Contents
Executive summary
Part 1.
Iceland’s Way Out of the Crisis
1. Mapping the progress:
1.1
1.2
1.3
1.4
How to cut and not cut welfare expenditures
Iceland’s and Ireland’s approaches compared
Growth and employment
Wages and private consumption
2.
Debt relief in the context of austerity
2.1
2.2
Debts and debt burden up to 2011
Debt relief and redistribution
Part 2.
The Policy Responses 2011-2012 in detail
3.
Welfare monitoring activities
4.
A major new investment plan for job creation
5.
Poverty alleviation
5.1
5.2
Poverty alleviation – Towards the 2020 goals
Poverty reduction amongst the elderly
Appendix I: IMF’s 2012 verdict on Iceland’s debt relief program
Appendix II: Extra data
References
3
Part 1.
The Icelandic Way Out of the Crisis
Now three and a half year after the spectacular collapse of the Icelandic financial system of
October 2008, we are in a position to assess quite profoundly how Iceland tackled this excessive
crisis. What we find is that Iceland’s approach appears to have been quite successful to date. We
also find that Iceland has partly designed its own policy approach, in cooperation with the IMF,
exemplifying its own special strategies. We explain the main characteristics of this Icelandic
approach and how it has worked in practice.
The main characteristics of the approach are an emphasis on redistribution, through the tax
system and the social protection system, along with debt relief measures that also were
disproportionally aimed at the middle and lower income groups. Redistribution meant that need
for expenditure cuts, classic austerity measures, were not as great as otherwise would have
been. Various efforts to alleviate unemployment were also implemented. While the national
currency (the Icelandic Krona) had a role in exaggerating the bubble economy effect prior to the
crisis, its devaluation (which started at the beginning of 2008, well before the collapse of the
banks) helped export industries maintaining their operation after the collapse. The cost of that
devaluation however fell drastically on households, with a big cut in real earnings (through price
inflation while incomes lagged behind). That cut in living standards fell however disproportionally
on higher income households, partly due to the policy of redistribution.
We will start by profiling the progress through the crisis to date, mainly with statistical material.
Then we survey policy measures and their results, with a special focus on debt relief, position of
pensioners and poverty alleviation, also with a reference to the EU2020 goals as well as Iceland’s
2020 goals.
1.
Mapping the progress
Iceland’s government that came to power in February 2009, a few months after the collapse,
pledged itself to pursue egalitarian welfare policies as far as possible and to shelter lower and
middle income huseholds against the vagaries of the crisis. The main tools of that approach were
the tax and benefits policy, debt relief, employment policy and activation. Given that government
finances were in ruins immediately after the collapse the task of being “a Nordic welfare
government” in those circumstances was gigantic indeed. The government started its course of
financial and economic resurrection of Iceland with a 14.5% deficit on the government budget,
massively increased debts of government, firms and households and a seriously eroded level of
trust amongst the public as well as amongst trading partners and governments of neighbouring
countries. So the task was enormous by any standard. Iceland was however falling from great
heights that also meant that there was some room for dealing with a serious setback. The society
should have been able to take cuts in living standards.
The government embarked on a program of resurrection based on improving public finances by
raising tax revenues on the whole as well as by cutting expenditures. Welfare expenditures were
however sheltered, with a lower overall degree of cuts than in other sectors of public
expenditures. Welfare expenditures were also rearranged, such that there were significant
increases in some areas while cuts came in other areas. Welfare expenditures were on the whole
more directed at lower income huseholds, both pensions and benefits, and while the overall
taxation level was raised the actual tax burden on lower and just over middle-income level
households were actually lowered while the tax burden on the top 40% were increased
4
(Kristjánsson and Ólafsson 2011; Kristjánsson 2011)). There were however some increases in
indirect taxes (VAT went from 24.5% to 25.5%) that are more regressive in nature.
1.1
How to cut and not cut welfare expenditures
In figure 1 and table 1 we profile the main features of the expenditures development through the
worst of the crisis years (2009 and 2010; the upswing was firmly in place from the latter part of
2010 and throughout 2011 as we show in the next section).
350000
300000
9
160000
8
140000
250000
7
200000
150000
6
100000
5
120000
100000
80000
50000
4
De
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1
2007
2008
2009
2010
60000
3
2
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0
40000
20000
0
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
% of GDP
Total transfer expenditures at 2011 prices
Figure 1: Development of total public and social transfer expenditures through the crisis
Source: Statistics Iceland
Overrall public expenditures of course increased greatly, due to various costs of the collapse.
Thus we for example see on the left diagram of figure 1 how cost of economic affairs skyrocketed
in 2008, covering gigantic one-time costs of resurrecting general banks and refinancing the
Central Bank. Expenditures on all main posts, other than social protection and economic affairs,
came significantly down, including expenditures on health, recreation and culture, as well as on
education. Expenditures on housing (debt relief) also increased greatly in 2010. Despite cuts in
education the enrolment of students, both at secondary and tertiary levels, significantly increased,
since that was particularly promoted, including through activation programs. Efficiency in
education thus increased, i.e. more students were accommodated despite lowered funding. It
however remains to be seen if this eroded standards.
The diagram on the right shows overall expenditures on transfer to households, both as a
proportion of GDP and in real value Kronur up to 2011. They increased significantly, going from
6% of GDP to more than 8%. Transfers had come down a little in 2010, which was a difficult year
with a great austerity effort. The overall increase in real values is very decisive and social
protection expenditures are now higher than they have ever been in Iceland, both proportionally
and in real value Kronur. An important feature of the social protection expenditures, not reflected
in this data, is the fact that expenditures became more directed at lower and middle-income
groups and cuts were more directed at higher income groups. This also facilitated the
redistribution effect.
In table 1 we profile the social protection expenditures in more detail to better reveal the
characteristics of the policy, which was of course highly restrained by the generally appalling
state of public finances.
5
Benefits expenditures were increased in real value from 2007 to 2010 by 11.6% while services
were cut on the whole. The biggest increases were for unemployment benefits (620% increase)
and the second biggest was for services to the unemployed (activation and special programs, an
increase of 60%). Then came the category of housing, which primarily consists of expenditures
on debt relief, with an increase of 59%. Expenditures on benefits related to social exclusion (not a
particularly big category) were increased by 45% while there were some cuts in services there (4.6%).
Of the biggest expenditures categories disability pensioners got a sizable increase in real
expenditures, with benefits increased on the whole by 18.2% and services (a small category) cut
by 1.1%. Health care services were cut by 9.7% (mainly the hospital services) but public sickness
benefits were cut more, or by 19.6% (most working people who become seriously sick maintain
their wages for up to 3 months and then have a right to union provided sickness payments for
another 9 months. Some of the cuts in public provisions may have been achieved by transferring
more individuals onto these other provisions). For the elderly cash benefits were cut a little, by
3.7% but more went on services for them (+1.3%).
Both in the case of disability pensioners and old-age pensioners expenditures were to a greater
extent directed at lower income pensioners while cuts were implemented for pensioners with
higher earnings (such as from occupational pension funds and from other sources). Hence
targeting of expenditures was in fact increased.
Table 1: Development of social protection expenditures from 2007 through 2010, in real Icelandic Kronur
(prices of 2010) and % change.
Expenditure on social protection
Social benefits, cash
Services
1. Sickness and health care
1.1 Cash benefits due to sickness
1.2 Health care services
2. Disability
2.1 Cash benefits due to disability
2.2 Disability services
3. Old age
2.1 Cash benefits to elderly persons
3.2 Services to elderly persons
4. Survivors
2.1 Cash benefits to survivors
5. Families and children
2.1 Cash benefits to families and children
5.2 Services to families and children
6. Unemployment
2.1 Cash benefits to unemployed persons
6.2 Services to unemployed persons
7. Housing
8. Social exclusion n.e.c.
2.1 Cash benefits due to social exclusion
8.2 Services due to social exclusion
2007
1137.2
552.6
584.6
2008
1164.3
570.5
593.7
2009
1235.8
649.2
586.7
467.5
84.8
382.7
147.2
109.8
37.4
254.5
232
22.4
27.6
27.6
151.5
74.3
77.3
12.6
10.6
2
32.2
31
13.5
17.4
467.1
82.8
384.4
160.5
120.1
40.4
257.2
233.5
23.7
26.8
26.8
155.5
75.8
79.7
19.4
17.2
2.2
35.9
29.8
14.4
15.4
440.8
70.4
370.3
172.8
136
36.8
259.6
236.7
22.9
29.7
29.7
154.6
76.9
77.7
83.5
81.7
1.9
47.6
35
17.7
17.3
2010 Change in %
1185.2
4.2
616.7
11.6
568.5
-2.8
414
68.2
345.7
166.9
129.8
37
246
223.4
22.7
28
28
151.1
71.4
79.7
79.6
76.3
3.2
51.1
36.1
19.6
16.6
-11.4
-19.6
-9.7
13.4
18.2
-1.1
-3.3
-3.7
1.3
1.4
1.4
-0.3
-3.9
3.1
531.7
619.8
60.0
58.7
16.5
45.2
-4.6
Statistics Iceland
In the field of family policy cash benefits on the whole were reduced by 3.9% while expenditures
on services were increased a little (+3.1%). The cuts in family benefits came primarily on birth
leave provisions (maternal and paternal leaves), while child benefits’ expenditures were raised a
little and they also became more targeted at lower income groups (with more significant increases
there).
6
Thus in the welfare expenditures development as well as in tax and benefits policy there were
significant measures aimed at redistribution. This was a good measure from a Keynesian
perspective, i.e. to shelter the lower income households from cuts in living standards (Krugman
2012; Reinhart and Rogoff 2009). That is so because it not just reliefs the burden on the backs of
those who are most vulnerable but it also helps keep up the consumer demand (even though all
households got significant cuts in living standards), since lower income households spend most
of what they have. The cuts were decisively more directed at the higher income-earning
households.
Iceland now seems to have succeeded at least partly with its goals of sheltering the lower income
groups, as we show in the next two sections.
1.1
Iceland’s and Ireland’s approaches compared – Role of redistribution
Ireland and Iceland share the dubious status of both having been „tiger economies“ (the Celtic
tiger and the Nordic tiger respectively). While such labels conveyed positive images of
enterprising and dynamic economies and success before the financial crisis they now better
serve as symbols of unsustainable bubble economies, driven by speculation and debt
accumulation (Ólafsson 2011a; Aliber and Zoega 2011; Thorhallsson and Kirby 2011).
Now it appears that Ireland and Iceland have however to a significant extent chosed differing
ways of coping with the crisis. There are however notable differences in the character of the
respective crises (in Ireland it was more of a housing bubble while in Iceland the general business
speculation element was larger than the housing bubble aspect). There are also differences in
Iceland having its own currency (Icelandic krona) and Ireland having the Euro. The Icelandic
banks were too big to be saved, but Irelands banks were saved with public money, at a great cost
to the tax payers. Icelandic tax payers were however showered with extensive costs, associated
to cost of resurrecting the banking system, including the Central Bank that literally went
banckrupt.
It is thus of great interest to compare how the burdens of the crises were placed on different
income groups in the societies in question. We show an indication of this in figure 1.
20
8
10
0
Changes in %
-2
-10
-9
-9
-14
-11
-13
-11
-13
-20
-30
-12
-14
-9
-8
-9
-14
-14
-15
-17
-26
-40
-38
-50
I
II
III
IV
V
Ireland
VI
VII
VIII
IX
X
Iceland
Figure 1: Cuts in real disposable earnings of households during the crisis, by income groups: Iceland
2008-10 and Ireland 2008-9 compared. Income deciles, from lowest incomes (group I) to highest (group
X).
Statistics Ireland: EU-SILC report 2011 and Icelandic tax data from Social Research Institute
7
Here we show the cuts in real income earnings of households, by ten income groups (deciles –
10% of households in each), from the lowest earning (on the left of the diagram) to the highest
earners (on the right). The columns and figures indicate how much real disposable earnings were
cut in each income group for the period in question (Iceland from 2008 to 2010; Ireland 2008 to
2009). Unfortunately we only have data from Ireland’s EU-SILC survey up to 2010 (income data
for 2009), so the experience of Ireland is only representative of the early part of the crisis while
the Icelandic figures cover the years of the main cuts in living standard, which were 2009 and
2010. Ireland has however gone through repetitive austerity measures after 2009, some of which
may have hit the lower groups significantly.
So if we look first at the lowest income groups they lost 26% of their real disposable earnings in
Ireland while the corresponding group lost 9% in Iceland. The second lowest group in Iceland
also lost about 9% while the median groups lost 14% and the top decile group lost 38%. Hence
the burdens were disproportionally born by the higher income groups in Iceland. In Ireland the
opposite was the case. The lowest income group lost most and then the cuts in disposable
earnings were less marked the higher up the income scale one went. In decile number 9 the loss
was only 2% in Ireland and the top decile actually gained 8% in this early part of the recession.
So we have here completely opposite patterns of sharing the burdens of the crisis. Studying how
the burdens were shared in other countries we see that in the USA the pattern was similar to the
Irish pattern, even though loss of real disposable earnings was not as extensive in the USA. A
similar pattern emerges for the UK, even though the top income groups there did not do as well
as the top groups in Ireland (Ólafsson and Kristjánsson 2012).
We show later on in the report how this outcome in Iceland was effected, i.e. with raising of
minimum pay, minimum pensions and benefits, and with lowering the tax burden of lower and
middle income groups while taxes were significantly raised on the highest 40% of income
receivers. Iceland also succeeded well in averting extensive unemployment levels compared to
other crisis countries. Debt relief was also directed more at lower income groups (especially the
subsidies for housing interest costs).
But let’s now see how Iceland progressed through the crisis, which is directly related to the
approach taken.
1.3
Growth and employment
First we look at the economic growth record and the unemployment level’s development through
the crisis years (figure 2).
As the left diagram of figure 2 shows the contraction of growth was already started in the second
quarter of 2008, i.e. half a year before the collapse of the banks in October. Negative figures were
there from third quarter, but the main decline in GDP came in all quarters of 2009 and stretching
into the first two quarters of 2010. Then the bottom seems to have been reached and by last Q of
2010 the contraction is only -0.4%. Then healthy growth has prevailed from the first Q of 2011
and throughout that year and recent news also shows that the first Q of 2012 had a growth of
2,4% (http://hagstofa.is/Pages/95?NewsID=8708), i.e. from the last Q of 2011 to the first of 2012.
So the predictions for a 2.5-2.7% growth for the whole of 2012 already seem not to be overstated.
The unemployment record is also relatively good, even though its level is historically high in
Iceland. On the whole unemployment in Iceland only surpassed the EU average in the second
quarter of 2009 and since then it has been below the EU average and it is coming on the whole
slowly down (albeit with seasonal variations). When compared to the other countries that went
8
GDP growth, 12 months' change by quarters
(%)
7.9
5.8 7 65.8
5 3.2
2
10
3.5 42.8
1.9 3.1
1.3
0
-0.4
-2
-10
-0.4
-3.4 -4
-5.4
-5.6
-6.4
-6.6
-6.8
-7.2
-8.2
Q1
Q3
Year's…
Q2
Q4
Q1
Q3
Year's…
Q2
Q4
Q1
Q3
Year's…
-5
2007
2008
2009
2010
2011
Unemployed as a % of
labour force
really deep into the crisis (the Baltic states, Ireland, Spain, Greece and Portugal) Iceland’s record
is relatively good.
30
20
10
0
EU average (27)
Ireland
Latvia
Spain
Greece
Portugal
Iceland
Figure 2: Real change in GDP by quarters, 2007 through 2011 and unemployment development in some
of the crisis ridden countries. Statistics Iceland and Eurostat
As shown in the right hand diagram of figure 2, all of these crisis countries except Latvia are still
increasing their unemployment levels while Iceland’s unemployment has not just been at a much
lower level but remained similar or has come down. News is now coming in that registered
unemployment in Iceland in May 2012 was lower than previously measured during the crisis so
we are seeing further lowering of the unemployment level in 2012 (http://www.vinnumalastofnun.is/heim/).
The prognose for Iceland’s growth and unemployment in 2012 is thus generally very good
compared to the biggest part of EU nations, even compared to some of the most prosperous
countries that were not seriously hit by the financial crisis (see data on GDP growth in 2011 and
2012 in Appendix II).
Then we look at real wage developments and private consumption.
1.4
Wages and private consumption
Figure 3 shows (left diagram) the yearly changes in real wage rates up to February 2012. The
figures are 12 month changes from February to February.
The biggest cut in real wages came in 2009 (-9.3%) and then further -3.4% were added in 2010.
There was however a collective bargaining agreement reached between the labour market
partners and government in the spring of 2010 which delivered some increase in real wages
during the latter half of 2010, which was quickly reflected in some increases in private
consumption.
What is then of particular interest is that another bargaining round was concluded in the spring of
2011, which also coincided with a comparable increase in pension and unemployment benefit
levels. This produced a significant increase in real wage rates in the 12 months period from
February 2011 to 2012. The increase for that period is the largest yearly increase recorded since
the year 2000, as the figure shows (in fact it is the largest increase since 1997; cf. Ólafsson and
9
Kristjánsson 2012). So the move towards regaining some of the purchasing power lost is already
significantly began.1
4
4.1
0.9
2
4.1
3.7
1.3
2
4.6
3
2.2
0
-2 -1.1
-4
-6
-0.2
-3.4
120
Indexex: 2008=100
% change last 12 months
(February to February)
6
100
80
60
2008
40
2009
20
0
-8
2011
-9.3
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-10
2010
Figure 3: Real wage development 2000 to 2012 (12 months change, February to February) and a
comparison of private consumption development through the crisis amongst selected crisis countries
2008-2011.
Statistics Iceland and Eurostat
The diagram on private consumption supports our interpretation of the turnaround having been in
the latter part of 2010 and then firmly consolidated in 2011. Private consumption came down by
some 20% from 2008 to 2009 in Iceland (in line with the mean cuts in real disposable earnings)
and then increased on the whole for 2010 and again in 2011. It seems set to reach or surpass the
2008 level during the present year of 2012.
Is is also particularly revealing to compare the private consumption development in the other
countries to that of Iceland. The EU average came down only by some 4% in 2009 but then
regained that the following year. That is perhaps not surprising given that the Euro kept ist value
quite well, despite serious problems in some countries. Greece evidently came later to the crisis
situation and the cuts in private consumption there were very small by 2011 but seem set to
increase this year and perhaps in the following years (the economic growth prognose for 2012 is
quite dismal in Greece on top of last year’s bad performance). But the Baltic states which went
deep like Iceland are showing a relatively strong recovery. Latvia recorded that however only in
2011.
The case of Ireland is then again quite interesting compared to Iceland’s case. Ireland went
slower down in private consumption than Iceland but has continued on a downward slope through
at least 2011, while Iceland is firmly on the upward slope since 2010. Ireland has an economic
growth prediction of 0.7% for 2012 so the prospects for a quick recovery in living standard still
remain less than good. That, along with the unfavourable unemployment level development, may
indicate that Ireland’s approach of forceful austerity without significant redistribution measures,
where the heaviest burdens seem to have been landed on the lower and middle income groups,
has not been good for growth or unemployment (Krugman 2012; Thorhallsson and Kirby 2011).
It should be kept in mind in this context that the cuts in real wages are significantly lower than the cuts in disposable
family earnings (closer to 14% for the median groups and closer to 20% for the mean; as reflected in figure 1). The
reason for larger cuts in disposable earnings is the fact that reduced work volumes and fringe benefits lead to lower
earnings beyond lower real wage rates, also the higher unemployment levels (see for further disaggregations of cuts
in living standards in a report by Ólafsson and Kristjánsson 2012).
1
10
Now we need to look at debt issues, which have been highly debated and remain controversial in
Iceland, despite significant progress.
2.
Debt relief in the context of austerity
2.1
Debts and debt burden up to 2011
In the third 2011 report for Iceland we outlined the main measures implemented for debt relief in
2009 and 2010. These involved both measures to lower principals of housing debt for households
with lower earnings and highly negative equity situation, as well as debt relief measures (freezing
of repayment while refinancing or restructuring debts and increased subsidies of interest cost of
housing loans). The raising of the tax relief for interest cost of housing loans was perhaps the
most consequensial measure for most households, and more so for the lower and middle-income
households. The policies in place now (in 2011 and 2012) are primarily the same and the main
changes are fine-tuning in their implementation and speeding up of dealing with individual cases
(slow process in debt restructuring and write-downs have continually been criticised in public
debate and in politics).
In its most recent report on the finance and economy of Iceland the IMF hails Iceland’s debt relief
program as particularly strategic and well carried out. The Fund ranks it as outstanding along with
Franklin D. Roosevelt’s program from 1933, branding the two as both extensive and well
structured (unlike some other such programs). The Fund estimates that by 2011 15-20% of
household debts have been written down on average in Iceland or are in the process of being
written down. But this is not at all a flat rate write-down but strategically aimed at the more needy
households (IMF, April 2012, chapter 3).
Since there have not been decisive changes in debt relief policies in the months of 2012, but only
fine-tuning of policies in place, I will focus here more on outcome measures of the debt issues,
since we now have better data on that.
In figure 4 we show the real debt development for households, from 1993 through 2011,
separately for housing debts and consumer debts (branded as “other debt” in the diagram). Then
in what follows we show the development of debt burden in relation to disposable household
earnings and after that we show the extent of subsidies of interest cost for housing loans and how
that has developed through the crisis.
11
5.0
4.0
3.0
2.0
1.0
Housing debts
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0.0
1993
Million IKR per capita (fixed prices)
6.0
Other debts
Figure 4: Debts of households, 1993 through 2011; housing debts and other debts. Debts in real Ikr. per
capita (prices of 2010).
Social Research Centre: Tax data analysis and Central Bank estimate for 2011.
As figure 4 shows the debt level of households was increasing continually through the period
before the collapse, but with increased speed after 2003, i.e. as the bubble economy gained
momentum (Aliber and Zoega 2011; Ólafsson 2011a). The housing debts (mortgages) reached
their height in 2008 but have come down from then. The Central Bank estimates that in 2011 the
overall debt levels of households were reduced by 8% (Central Bank 2012; see also Thorvardur
Tjörvi Ólafsson and Karen A. Vignisdóttir 2012).
Most loans to households in Iceland are indexed to prices and thus the principal increases with
inflation. Inflation had started to increase from late 2007 and onwards in early 2008, so inflation
was already then adding to the increased debt level. This was exacerbated further with the fall of
the banks in October, which produced and instant inflation bomb. Inflation continued at a rather
high level in 2009. The fact that real housing debts came down in 2009 despite the inflation effect
is important and reflects writedown effects. Then in 2010 the effect of the government’s debt relief
measures came to be significantly felt and more so in 2011. So by end of 2011 the debt level of
households seems clearly to have been lowered significantly, in fact approaching the level of
2007. But real disposable earnings were greatly lowered by the devaluation of the currency so it
is more difficult to deal with the debt now than before, even though the real wages have started to
increase again. Much still remainst to be gained on that front.
Another aspect of interest in figure 4 is the growth of other debts (consumer debts, mainly due to
cars, other consumer loans and credit card debts), which also took to the skies after 2003. Loans
for car purchases were generally in foreign currency denominations and came up with the
collapse of the Icelandic Krona in 2008. Hence it is not surprising that those debts reached their
zenith in 2009, a year later than mortgages. There were also less extensive write-downs efforts
on those loans until in 2010 and 2011, after they had been ruled illegal by the Suprime Court
(Hæstiréttur).
That led to a conversion of such loans to something more resembling the terms of Icelandic
Krona loans that involved a significant write-down of principals, generally in the region of 20-45%.
This came across the board more or less for these types of loans (varying with terms and age of
the agreements). Since such loans are generally to a shorter term (often 6 years for a car loan)
the repayment burden is quite high. These write-downs were thus very important for the
concerned households. Still some households continued to increase debt during the crisis. Some
12
cases of foreign currency loans are still waiting rulings by the courts and signs are that some
further cuts in debt levels of foreign currency loans may be achieved later this year.
Figure 5 then shows the development of the debt burden, i.e. cost of interest payments as a
proportion of disposable family earnings.
As that figure shows the average overall debt burden of households (loan servicing as % of
disposable earnings-DP) went from 7.7% in 2007 up to 13.3% of DP in 2009 and 2010.
Previously the debt burden had increased from 1999 to 2004 (6.7% to 8.7%), both because of
increased debt levels (with higher housing prices) but also due to reduced subsidies for housing
loan interest costs at that time. Net burden of the housing loans went up from 4.2% to 5.7% in
that period, with the top of 2004 being the highest debt burden of housing loans to date. The debt
burden of housing loans went from 4.1% in 2007 up to 5.7% in 2009, when it reached its height
after the advent of the crisis, but lowered again in 2010, i.e. to 5.4%. So in 2010 the payment
burden of housing loans is lower than it had been at in 2004 and similar to the level of 2005. The
lowering of the debt burden of housing loans has much to do with the greatly increased subsidies
for housing loan interest cost, as we show below, but some effects of write-downs of loans are
also consequential in this respect.
13.3 13.3
Debt servicing as % of family disposable earnings
14
12
9.5
10
8
8.7
7.0
6.9
6.8
6.8
6.7
6.5
6.7
7.2
7.6
8.0
8.0
6
4.2
4.2
4.1
4.1
4.1
4.2
4.4
4.6
4.9
5.0
1.3
1.2
1.2
1.3
1.2
1.3
1.3
7.7
5.7
5.3
4
2
7.8
6.4
5.7
4.3
8.2
1.7
1.9
2.0
1.9
2.0
2.2
5.0
4.2
4.1
2.6
2.8
3.5
5.7
5.4
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net burden of housing loans
Total debt burden
Burden of other loans
Figure 5: Debt burden (interest cost) as % of family disposable earnings, 1993 through 2010. Housing
debts and other debts separated. Net burden of housing debt is interest cost minus interest cost subsidies
(i.e. they come as tax rebates).
Tax data, Social Research Centre 2012
Another interesting feature of figure 5 is the development of the debt burden due to other loans
(car and consumer loans). These climbed much faster than housing loans, going from 2.8% in
2007 to 6.4% in 2009, when it topped. Then it came down in 2010 to 5.7%. So in fact the burden
of consumer loans became higher than the burden of housing loans during the deep crisis years.
This is very much out of line with the general discussion in the society, where complaints about
increased burden of housing loans and fundamentally changed conditions for housing debts, a
point that is frequently used as base for demands for flat rate cuts in debt levels (which would
actually benefit the higher income groups more than the present strategic approach of directing
the debt relief towards middle and lower income households).
Consumer loans are not subsidised in Iceland, unlike mortgage interest costs, so that explains
part of the greatly increased burden of the consumer loans, in comparison to housing loans. But
13
the write-downs of car loans (in foreign denominations) was already easing this burden of
consumer loans in 2010 and we know that this was also progressing well during 2011. So the
debt burden of consumer loans will be lower in 2011 and also in 2012. Then the increased
purchasing power also reliefs the situation to some extent, even though much still remains to be
regained on that front.
Next we look at the extent and development of the debt relief associated to the tax subsidy of
interest cost of housing loans, in figure 6.
The figure shows the average value of the tax subsidy for interest cost of housing loans as a % of
the housing loans’ interest cost. So in 1995 the government was in effect paying 27.3% of the
interest costs of housing loans on average. From then on and up to 2005 the real and relative
value of the subsidy came down quite significantly, by more than a half, ending at just over 12%.
Then it came up to 18.4% in 2006 only to come down again in the top bubble year of 2007. After
the collapse it was increased again up to 19% and then in 2010 it rose gigantically up to 30.9%,
higher than at any time before in this period (and probably higher than ever before).
Subsidies for mortgage interest costs
(% of cost)
35
30.9
26.627.326.725.6
25.0
23.9
22.5
25
21.420.420.4
18.4 18.719.2
18.0
20
15.6
15.1
12.3
15
30
10
5
0
Figure 6: Subsidies of housing loans’ interest cost (subsidies as % of interest cost), 1993 through 2010.
Average for all income groups.
Icelandic tax data, analyzed by Social Research Centre, University of Iceland
This means that on average the government pays about 31% of the interest cost of housing
loans. This is the average but when we look at this support by income groups we see that more
goes to lower income groups and less to the highest. Figure 7 exemplifies that quite clearly.
14
Subsidies for housing interest costs (% of cost)
50.00
45.00
40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Lowest decile
Median decile
Top decile
Figure 7: Redistributive effect of the subsidy for housing loans’ interest cost. The subsidy as a proportion
of housing interest cost in three income groups: lowest decile, median decile and the top decile.
Icelandic tax data, analyzed by Social Research Centre, University of Iceland
The general pattern is the same for low and middle-income groups: a sharp decline from 1995 to
2005 and then a steep increase again, most marked in 2010. The top income group, which had
lost this support completely by 2006, did actually get some support again in 2010, but at a much
lower level than the middle and low-income households.
The diagram also shows that for the low-income group (lowest decile of households) the
government pays close to 45% of the interest cost of housing loans, while it is closer to 35% for
the median groups, i.e. those in the middle of the income scale. So there are indeed strong
redistributin effects at work in this measure. Some countries do not have such measures as the
subsidies on interest cost, but this is very important in Iceland which has had a higher inflation
level than most other Western nations for a long time and loans are generally inflation indexed
(Ólafsson 2011; Aliber and Zoega 2011; Snævarr et.al. 2010). So the subsidy shelters against the
worst effects of inflation on debt burden, especially when so strategically directed as was done in
2010.
Still the debt burden is high and many continually complain about that. The main reason for that is
however, as we have shown, that the general purchasing power has come decisively down and
consumer loans play by now a larger role than the burden of housing loans, due to the generous
subsidies for interest cost of housing loans. The burden of housing loans is no more the biggest
debt burden for the majority of indebted households.
Statistics Iceland published a report on overall housing cost burden by the end of April this year
(Hagstofa Íslands 2012), based on EU-SILC data. Their conclusion is in line with out conclusion
above, based on our own analysis of public tax data. The finding of Statistics Iceland is clearly
that the overall burden of housing cost was higher in 2004-5 than it was in 2010. As we have
shown this has much to do with the raising of the interest cost subsidy.
In figure 8 we lastly compare the overall housing cost of households in the EU, based again on
EU-SILC data for 2010 (income data for 2009).
15
35
30
25
20
%
15
10
5
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Share of housing cost in disposable income
Housing cost overburden
Figure 8: Housing cost as % of disposable family earnings (DE) and housing cost overburden (with
housing cost as more than 40% of disposable earnings), 2010 (2009).
Eurostat
Here we see that overall housing cost (debt burden, rent, heating, water and electricity, along with
maintenance) is in the region of 17-18% of DE for Icelandic households. Just below 10% have
housing cost overburden (i.e. housing cost taking more than 40% of disposable earnings). This is
after the great increase during the years leading up to the crisis and immediately following the
collapse. Iceland is in the 10th place, not far above the EU average, and we know from the
analysis above that the situation improved significantly in 2010 and also in 2011. On the whole
Iceland enjoys relatively low cost of heating, water and electricity, so that may counter the
outcome of a more direct comparison of housing loan costs (Central Bank-Ólafsson and
Vignisdóttir 2012). Arrears on housing loans and consumer loans became high in Iceland after
the ionset of the crisis, not least due to the fall of real disposable earnings.
Part 2.
The Policy Environment in 2011-2012
In general terms the government that came to power in February 2009 declared its intentions of
using the welfare state or the social protection system to shelter households, especially average
and lower income households, from the consequences of the crisis, as far as possible. While the
government budget had to be cut due to the devastating conditions of public finances immediately
after the collapse in autumn of 2008, the aim was still to go softly on welfare expenditure cuts and
also redirect those expenditures so that they might help reaching the government goals of
sheltering lower income groups, while at the same time raising taxes on those with higher
earnings as well as those who gained the most during the bubble period.
Most of the policies to deal with the crisis effects were put in place in 2009 through 2011. The
progress in 2011 and to date in 2012 has mainly involved adapting and managing the
implementation of these policies. The debt relief measures have been the biggest and most
controversial policy area. The measures were the following:
 General debt relief: Debtors in difficulties with negative equity values can get their debts
reduced to 110% of the value of their assets, up to the value of a modest home (taking
account of family size).
16
 Special debt relief: This is a more restricted measure, open to fewer families and only to
people in very serious difficulties, which offers more write-offs that the general relief.
 Increased interest rebates through the tax system: The special targeted tax rebate on
interest payments for housing loans was raised significantly at the start of the crisis.
 New temporary general subsidy on interest cost: This is a new temporary feature,
introduced in 2011 (effective for income year 2010), directing more aid in the form of
direct subsidy payment to homeowners in financial hardships. This is universal in the
sense of not being income-tested, but it is instead asset-tested, i.e. once net value of the
family asset goes beyond a fixed sum it is reduced and eventually faced out. This can
give an indebted family up to 1800 Euros in subsidy of their interest burden in a year. The
government bargained with financial institutions and pension funds to finance this
measure.
 Special effort to aid families in arrears: A special effort is made to reach all families
who are in arrears with their mortgages before 1st of June 2011.
 New social measures in housing provisions: The government organizes a special
effort, in cooperation with financial institutions, local authorities and NGOs, to establish
more varied options in family housing, including new renting options. Rent rebates were
increased at the beginning of the crisis and they are to be kept at a higher rate than they
were at before the crisis.
To date these have primarily been subjected to fine-tuning and improved functioning. Many have
complained about slow progress in processing of applications for the various relief programs. But
as indicated in the most recent IMF report between 15 and 20% of household debts have already
been or are in the process of being written down. This is most likely to be large compared to other
countries and the extent of subsidies on cost of interest on housing loans is also extensive, as we
showed above.
On the whole significant results are being harvested in relieving debt and thereby in averting
negative effects of high debt levels on economic activity. That is an important effect of social
protection measures, not just for relieving burdens on those who are more vulnerable but also for
facilitating economic recovery. In that sense there is close affinity between redistribution effects
and economic stimulus effects, in the best of Keynesian traditions (Krugman 2012).
3.
Welfare Monitoring Activity – The Welfare Watch
Early in 2009 the government set up a new body to monitor welfare developments during the
crisis, with the aim of providing early warning of dismal developments, aimed to air issues of
concern and guidelines to administrators, government and social organizations in the third sector.
The body went by the name of the Welfare Watch (WW - see webside:
http://www.velferdarraduneyti.is/velferdarvaktin). It was based at the Ministry of Social Affairs
(later the Ministry of Welfare) and composed of representatives from government (ministries and
institutes), municipalities, social organizations and unions. Various subgroups were also formed
with the aim of focusing on special areas of concern. It was thus primarily a consultative body
with powers to issue guidelines and have influence on detailed policy decisions.
The WW has been quite active. It has commissioned reports and assessments of various policy
areas, sent out recommendations to targeted actors and reported regularly to government. The
main issue areas that the WW has focused on are the following:
 Welfare of children
17
 Problems of young individuals, aged 16-25
 Employment issues and job search
 Rationalization measures of municipalities (esp. related to provision of welfare to the
most needy – concerning the last stop in the welfare system)
 Social services of local communities
 Issues of disability pensioners (a traditional group of financial hardship and social
exclusion)
 Position of the elderly
 Issues concerning immigrants
The issues concerning welfare of children have been very strongly emphasized by the WW from
early on. For example at the outset of the crisis in 2009 the WW issued recommendations to
municipalities and individual schools that all children would be provided with school meals (which
was not universal at the time). They also issued concerns for dental health which has been one
area where Iceland has lagged behind the other Nordic nations, with dental health of 12 year old
kids significantly below standard (OECD 2010). This has been connected to the fact that dental
services have for long been less subsidized in Iceland than in the other Nordic countries, with the
consequence that lower income households save on this service, leading to lower dental health
standard. Sugar consumption has also been at a very high level in Iceland (cola drinks etc.). This
concern of the WW led to a new temporary government initiative in the summer of 2011 through
which families with low incomes were offered free dental services for their young children. This
was widely used and deemed successful.
This is just one example of the activities of the WW and the success of its work. It is difficult to
directly assess the influence of such a body on policy making, since much of the influence works
through the grassroot of the welfare system, even at the micro level (as for example reflected in
recommendations to schools). The value of this work is though clear, as a forum for agenda
setting, awareness raising and harnessing priorities.
The most recent activities of the WW have involved a focus on the South West region in Iceland
(Suðurnes), which is the area that has had the highest unemployment rate throughout the crisis
and hence has had sizable groups of vulnerable families. Last month the WW for example had a
review meeting with the sub-group mainly targeting that area to assess the progress in the area
(this sub-group of the WW was set up at the beginning of 2011 to better focus activities in the
region). At this review meeting, -which brought together all leading administrators of social
services in the region, union representatives, the local Red Cross, six governmental institutes,
reps of the church, education and parental associations – the current situation was detailed and
progress on the various fronts documented.
It was found that various measures organized by the Directorate of Labour (such as the Job
forum; Working Way Program; Education is a Working Way) had been quite successful in the
region. Representatives were particularly satisfied with the response of employers in taking part
in these and other programs, such as offering jobs with part financing of the Unemployment
Benefits Fund. It appears that there is more participation in such programs in that region than in
other parts of the country. There are also clear signs of increased participation of youth in
education, both at secondary and university level, as well as in special educational initiatives for
those with low educational levels to start with. Various plans are in operation for increasing
educational supply for the various needy groups. The programs also aim at reactivating early
school leavers from secondary level education, which has been an important goal in Iceland and
is one ot the Iceland 2020 goals that needs to be highly emphasized in coming years.
18
So on the whole the Welfare Watch has been an important and interesting innovation to emerge
during the crisis, directly addressing crisis-related issues. A more detailed assessment would be
required to fairly assess the value of this work, but in the Icelandic context there is a tradition for
allowing grassroot voices to be heard and one of the valuable roles of the WW has been to
channel these voices into bigger rivers of awareness-raising and pressure to get issues of
importance in the micro context to be aired at more macro level. This has clearly been important
and successful on many counts.
4.
A Major New Investment Plan for Job Creation and Stimulus
While the main crisis reaction policies aimed at households were already in place by the end of
2011, the concerns in recent months of 2012 have more been aimed at fine-tuning the operations
of these measures and strengthening. In the debt relief field this has for example involved
speeding up of time-consuming handling of individual cases. In the field of employment there
have been various focuses on special initiatives, both to activate, increase job search and support
to educational/re-skilling efforts.
The government has also through the crisis organized varius job creation plans to increase job
opportunities, especially for young people (including offers for summer-time jobs for students) and
the long-term unemployed. Examples of such programs are roadworks, maintenance work of
public buildings and projects financed by pension funds. One particularly interesting program
called Everyone Works/Gains (Allir vinna) involes a full refunding of the VAT on labour cost of
maintenance work on private houses (incuding summer cottages/huts), as well as a direct
lowering of income tax base of the homeowners. This has worked well for households not heavily
indebted (often slightly older families, i.e. aged 50-65) who have means of financing such work on
their property. The project has led to valuable job creation for construction workers who were
particularly badly hit with unemployment. It also brought more of such work up from the black
economy and thus the tax cuts offered were associated with simultaneously increasing the tax
base for government revenues. This has been very successful and is still in operation.
Recently the government has been working on a plan (the “Vinnandi vegur” plan) to provide jobs
for about a tenth of those on unemployment benefits. Most of this goal seems already to have
been achieved (www.vinnumalastofnun.is; forsaetisraduneyti.is). Other such programs are
Activating the Young (Ungt fólk til athafna) started in 2010, and Daring-Knowledge and
Experience for older unemployed individuals (Þor-Þekking og reynsla). Many of these initiatives
have been financed by the Unemployment Benefits Fund. The experience seems to indicate that
of the unemployed who take part in such programs, about 63% have left the unemployment
register within three months of finishing the program (velferdarraduneytid.is).
In May 2012 the government then introduced a new major investment plan for Iceland, for job
creation and economic stimulus (Fjárfestingaráætlun fyrir Ísland 2013-2015:
http://www.forsaetisraduneyti.is/frettir/nr/7175), to be initiated in 2013. The plan is put together in
the context of a turnaround of the economy having been achieved and due to the fact that Iceland
earlier this year graduated from the IMF program and started to pay back the loans that it
received from IMF and the neighbouring Nordic nations - in fact the first payback of these loans is
starting sooner than planned in the loan agreements. The new investment plan is large and
costly. How is that possible, given the depth of the crisis and the fact that many problems still
remain to be dealth with, including debt problems of government, firms and households, even
though progress has been significant?
The government plan is to be financed by two main sources: 1. Dividends from banks in public
ownership (they are doing well now), as well as by selling off some of the government shares in
19
the new banks (government owns 81% of Landsbanki, 13% of Arion banki and 5% of
Islandsbanki – these are the three main new banks that grew out of the ruins of the fallen ones);
2. Implementation of a special resource rental charge on fishing firms, for the use of the fishing
resources, that are legally owned by the public. Due to the large devaluation of the Icelandic
Krona in 2008 the profit conditions in the fishing sector are exceptionally good now and the new
levy (resource rental charge) aims to resolve a long-standing controversy over the benefits of the
rich fishing grounds in Icelandic waters. Hence the owners of fishing vessels will be forced to give
up a part of their profits to be used for common public purposes. Given the political controversies
surrounding this issue it has been difficult to carry through politically, but the government has a
majority for it and these very days it seems set to achieve the goal of passing the new legislation
within a few days. Hence the plan will be a prominent part of the budget for 2013 and presumably
provide a massive economic stimulus, particularly important for job creation.
The main policy of the plan is related to the Iceland 2020 plan, with an emphasis on job intensive
projects with knowledge economy investments, R&D, green economy and creative industry
investments, increased roads and infrastructure works, increased maintenance work and new
constructions (university and hospital buildings, housing for rental sector). This plan could make
the growth prognoses for 2013 even stronger than at present.
5.
5.1
Poverty alleviation – Towards the 2020 goals
Poverty and hardship profiles
The main policies for averting higher poverty levels were implemented in 2009 through 2011 and
are still in place. These involved increases in the amounts of minimum pensions
(lágmarksframfærslutryggingin) and benefits to lower income families, raising of minimum wages
which came by collective bargaining in the labour market, raising of minimum unemployment
benefit and last, but not least, reduction of effective tax burden on lower income groups, which
came already in 2009 and has been reinforced since. These policies have softened the impact of
the crisis on the most vulnerable households and individuals, even though nobody has been fully
insured from the effects of reduced living standards.
The fact that real disposable earnings of lower-income households were reduced less than the
higher ones reflects this effect (see figure 1 above). In figure 9 we profile the poverty
developments and financial hardship indicators for the years immediately prior to the crisis and up
through 2011. The indication there is that Iceland has succeeded in avoiding an increased
relative poverty rate during the crisis, in fact the 60% poverty ratio has come down from the low
level of just over 10% to 9.3% in 2010. Still financial hardship has of course increased, as
reflected in the indicators from the EU-SILC surveys, carried out by Statistics Iceland.
The proportion of households saying that it is very difficult to make ends meet more than doubled
from 2007 to 2010, from about 6% to just over 13%. The proportion lowered marginally in 2011
and we would ecxpect it to have lowered significantly by 2012. Other financial hardship indicators
also doubled (arrears on mortgages or rent; housing cost is a heavy burden). It is also interesting
that those indicators that refer to the burden of other loans show a marked decline in the
proportion having difficulty by 2011. That is most likely related to the write-offs of foreign
denominated loans for car purchases, which came on stream in late 2010 and in 2011. So that
supports our conclusions above regarding the debt burden due to other loans than housing loans.
20
Very difficult to make ends meet
Payments of other loans is a heavy burden
2003
Arrears on other loans
2004
2005
2006
Housing cost is a heavy burden (older
defini on)
2007
2008
2009
Arrears on mortgage or rent payments
2010
2011
% under 60% poverty line
% under 40% poverty line
0
5
10
15
20
25
Figure 9: Poverty and financial hardship profiles, 2003 to 2011 (% of households).
Statistics Iceland
120
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The proportion of households saying that housing cost is a heavy burden however increased up
to 2011 but arrears on mortgages and rent did not increase in that year. Hence there are
significant indications from these indicators of financial hardship that the share of households in
great difficulty has not increased any further or actually come down in 2011.
2007
2010
Figure 10: Percentage of low-income households (lowest quintile) at risk of poverty or social
exclusion, 2007 and 2010.
21
Eurostat
When looking at one of the EU2020 indicators (households at risk of poverty or social exclusion)
we see that when focusing specifically on low-income households (the lowest 20% of
households) Iceland scores very well indeed, with the smalles proportion of the population in that
risk category, along with the Czech Republic. Netherlands and Norway are significantly higher
than Iceland. It is also interesting in that respect that Iceland did not increase that proportion
during the early part of the recession period, as is evident from the figure.
In fact Iceland has already reached the EU2020 goals on that front and the crisis has not so far
involved a setback in that area. It is not likely to change from now on, except for the better with
the upswing on the move, assuming everything else remains unchanged.
1.9
2.4
2.3
2.9
2.8
3.8
3.7
6.5
6.0
4.4
3.9
5
8.4
7.7
8.9
10
8.5
11.5
10.3
12.8
12.0
14.3
16.8
15.2
19.3
24.2
20.9
19.1
14.1
15
19.3
20
20.3
% of households
25
23.5
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30
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a
I
Ire taly
la
n
Sp d
Po ain
l
Ic and
Lit ela
n
h
EU
u d
av Slo ania
er va
ag ki
e a
Sl (27
ov )
Cz
ec E eni
h sto a
Re n
Un
p ia
ite B ubl
d elg ic
Ki iu
ng m
d
Au om
s
Sw Fr tria
a
Ne itze nce
th rla
er n d
De lan
nm ds
Sw ar
Ge ed k
rm en
a
Fi ny
n
Lu No land
xe rw
m a
bo y
ur
g
0
2007
2010
Figure 11: Percentage of households making ends meet with great difficulty, 2007 and 2010.
Eurostat
Lastly in that section we show how Iceland compares with the EU nations in proportions of
population making ends meet with great difficulty in 2010 (figure 11). While the proportion in that
category more than doubled in Iceland it is still not far above the EU average. In fact 13 EU
nations do worse on that score. Given the enormity of Iceland’s financial collapse that seems like
a reasonable outcome to date. But again, we would expect Iceland to do better on those scores in
next two years’ surveys (2011 and 2012).
5.2
Poverty reduction amongst the elderly
Lastly we show some data on how the elderly have fared through the crisis. As can be seen from
figure 12, the proportion of population 65 years and older that has earnings under the 60%
poverty line, was reduced by about two thirds, from about 15% in 2007 down to 4.9% in 2010
(2009). That has remained so in 2011 (2010). This is related to the fact that the government
raised the minimum pension guarantee at the beginning of 2009 and the value of that has been
kept through the crisis, going further up with wages. This measure in effect pulled a sizable part
of the elderly population above the poverty line.
22
50
45.2
60
4.1
5.9
4.9
6.8
5.9
9.7
7.7
10.6
10
10.2
14.1
12.0
15.1
14.2
15.5
15.2
16.6
15.9
17.7
16.7
18.8
18.3
18.8
20.2
19.4
21.3
20
21.0
21.7
21.4
27.7
30
27.4
32.2
40
Cy
B u p ru
lg s
a
Sw Cro ria
itz a
e
Un
rl a a
ite
n
d Sp d
Ki a
ng in
d
G r om
P o ee c
rt e
Sl uga
ov l
Be eni
lg a
iu
La m
tv
M ia
Fi alta
De nlan
n d
Ro ma
m rk
EU
an
av
i
er It a
ag aly
e
(
S w 27
ed )
Au en
s
Es tria
to
P nia
Ge olan
rm d
No an
rw y
Ire ay
Lit lan
hu d
a
Fr nia
Cz
a
ec Slo nce
h va
Lu Rep kia
xe u
Ne mb blic
th ou
er rg
la
Ice nds
Hu lan
ng d
ar
y
0
2008
2010
Figure 12: Percentage of people aged 65 and over under the 60% poverty line, 2008 and 2010.
Eurostat
It is also interesting that this reduction of relative poverty amongst the elderly is quite a common
feature amongst EU nations, including some of the more seriously affected crisis nations, such as
the Baltic States, Ireland and Romania, in addition to Iceland. The elderly have in many cases
been sheltered from the harshest poverty during the crisis. Iceland has by 2010 the second
lowest poverty rate for the elderly, which is a significant gain from the pre-crisis level.
In Appendix II we also show figures on the minimum pension guarantee as a proportion of
minimum wages, indicating that since 2009 it has been higher in relation to wages than ever
before in Iceland. The value of the minimum pension in Iceland is probably now the highest there
is in Europe and not just poor old-age pensioners enjoy that but more significantly so the disability
pensioners. This is also very favourable for elderly single ladies, who are often widows that had
earned only little or no occupational pension rights. They have in fact been lifted above the
poverty line with this policy measure.
Ikr. per month on average
Figure 13 then shows how pensioners in general (disability and old-age pensioners together)
have fared through the crisis. The data show the monthly averages for the various income
components of pensioners and how they have developed in nominal values through the crisis, up
to beginning of year 2012.
300,000
250,000
200,000
150,000
100,000
50,000
0
01.05.2008
01.05.2009
01.05.2010
01.09.2011
01.01.2012
23
Figure 13: Earnings developments for all pensioners in Iceland from spring of 2008 to January 2012. Main
earnings components and effects of direct taxation.
Source: Social Security Administration, special analysis for SÓ.
Pensioners have lost considerable financial earnings (which have declined to about a third of the
2007 value). This has been more consequential for old-age pensioners. Pensioners have also
lost some employment earnings (mainly disability pensioners). On the other hand they have got
more from social security (due to the income-testing characteristics) and from occupational
pension funds (which are indexed to prices). By 2010 they had lost most of their after tax
disposable earnings but in 2011 and by beginning of 2012 they have started to regain some of
what has been lost, mainly due to increases from social security and occupational pensions.
25
22.9
The very last data we show is the proportion of persons living in households with very low work
activity, according to the EU-SILC measures.
10
4
4
15
13.1
12.6
12.2
11.8
11.1
10.3
10.2
10
9.8
9.8
9.2
9.1
8.9
8.6
8.4
8.2
7.9
7.9
7.7
7.5
7.3
7.3
6.9
6.8
6.4
5.9
5.6
5.5
% of households
20
5
Un
ite
d Ire
Ki l a
ng nd
Be dom
lgi
u
L m
Hu atv
Ge nga ia
r
Derma y
EU
nm n y
(2
a
7
co I r k
un tal
tri y
e
Sp s)
F a
Lit ran in
h u ce
Finania
Es lan
Po ton d
r ia
Ne tuga
th Ma l
er lt
a
Bu land
l
Slo gar s
v ia
Au akia
Gr stria
e
Po ece
No lan
d
Slo rwa
Cz
ec Ro ven y
h m ia
Re an
p ia
Sw ub l
ic
Lu Ic ede
xe el n
m an
bo d
Sw Cy urg
itz pr
er us
la
nd
0
2007
2010
Figure 14: Proportion of persons living in households with very low work activity, 2007 and 2010.
Eurostat
While that group has doubled in size in Iceland between 2007 and 2010 it is still the 4 th lowest
within the community of European nations. That reflects the generally favourable employment
situation in Iceland in comparison to other European countries (Andersen et.al. 2011;
Hannesdóttir et.al. 2010).
Appendix I:
IMF account and assessment of the debt relief measures undertaken in Iceland
(IMF April 2012):
Iceland during the Great Recession
The case of Iceland illustrates how a multipronged approach can provide debt relief to a large share of
households and stem the rise in defaults. Iceland’s bold policy response was motivated by the sheer scale
of its household debt problem (see Figure 3.10) and intense social pressure for government intervention.
In some of the largest protests ever seen in Iceland, thousands of people took to the streets demanding
24
debt write-downs. Over a two-year period, the government provided a framework for dealing with
household debt in the context of an IMF-supported program.
The approach to resolving the household debt problem had several elements. At the outset, stopgap
measures offered near-term relief in order to ensure that families did not lose their homes owing to
temporary problems and to prevent a spike in foreclosures leading to a housing market meltdown. The
measures included a moratorium on foreclosures, a temporary suspension of debt service for
exchangerate- and CPI-indexed loans, and rescheduling (payment smoothing) of these loans. About half
the households with eligible loans took advantage of payment smoothing, which reduced current debt
service payments by 15 to 20 percent and 30 to 40 percent for CPI-indexed and foreign-exchangeindexed
loans, respectively. At a later stage, households were given the option of restructuring their loans out of
court by negotiating with their lenders directly or with the help of a (newly created) Office of the Debtor’s
Ombudsman acting on their behalf. The negotiations are on a caseby- case basis but use templates
developed through dialogue between the government and the financial institutions. The templates provide
for substantial write-downs designed to align secured debt with the supporting collateral, and debt service
with the ability to repay. The case-by-case negotiations safeguard property rights and reduce moral
hazard, but they take time. As of January 2012, only 35 percent of the case-by-case applications for debt
restructuring had been processed. To speed things up, a debt forgiveness plan was introduced, which
writes down deeply underwater mortgages to 110 percent of the household’s pledgeable assets. In
addition, a large share of mortgage holders receives a sizable interest rate subsidy over a two-year period,
financed through temporary levies on the financial sector. Box 3.2 provides a detailed description of the
household debt restructuring framework.
Iceland’s financial institutions had both the incentive and the financial capacity to participate. After the
spectacular collapse of the country’s banking system, the three large new banks that were assembled
from the wreckage acquired their loan portfolios at fair value that took into account the need for
writedowns. This gave them the financial room to bear the costs of write-downs, and they frequently took
the initiative. Much of the cost of debt restructuring was borne indirectly by foreign creditors, who took
significant losses when the banks collapsed. Aligning households’ incentives to participate was more
complicated. The combination of indexation, inflation, and falling housing prices meant that the longer
households waited, the larger the write-down. The unconditional moratorium on foreclosures and the
suspension of debt service also reduced the incentive to resolve debt problems, and frequent revisions of
the debt restructuring framework created an expectation of ever more generous offers. It was only when a
comprehensive framework was put in place with a clear expiration date that debt write-downs finally
took off. As of January 2012, 15 to 20 percent of all mortgages have either been––or are in the process of
being––written down (see Table 3.1). For a full discussion of household debt restructuring in Iceland, see
Karlsdóttir, Kristinsson, and Rozwadowski (forthcoming).
Overall, while the jury is still out on Iceland’s approach to household debt, the policy response seems to
address the main channels through which household debt can exert a drag on the economy. A spike in
foreclosures was averted by the temporary moratorium and the concerted effort to find durable solutions to
the household debt problem. By enabling households to reduce their debt and debt service, the debt
restructuring framework transfers resources to agents with a relatively high marginal propensity to
consume. The financial-sector-financed interest subsidy is playing a similar role. Finally, the write-down of
a substantial portion of excess household debt (that is, in excess of household assets) mitigates the
problems associated with debt overhang. The extent to which the Icelandic approach is able to achieve
the ultimate goal of putting households back on their feet, while minimizing moral hazard, remains to be
seen.
Lessons from the Case Studies
Our investigation of the initiatives implemented by governments to address the
problem of household debt during episodes of household deleveraging leads to
the following policy lessons:
25
> Bold household debt restructuring programs, such as those implemented in the United States in the
1930s and in Iceland today, can significantly reduce the number of household defaults and foreclosures
and substantially reduce debt repayment burdens. In so doing, these programs help prevent selfreinforcing cycles of declining house prices and lower aggregate demand. The Icelandic experience also
highlights the importance of a comprehensive framework, with clear communication to the public and an
explicit time frame. It was only after such a framework was put in place that the process of household debt
restructuring took off.
> Ensuring a strong banking sector is crucial during the period of household deleveraging. In Iceland, the
fact that the new banks had acquired their loan portfolios at fair value meant that far-reaching household
debt restructuring could proceed without affecting bank capital. This also gave banks incentives to initiate
negotiations with borrowers. In contrast, in the case of Colombia in the 1990s and in Hungary today, an
insufficiently capitalized banking sector could not absorb the losses associated with (mandatory)
household debt restructuring. This resulted in a disruption of credit supply.
> Existing institutional features may influence whether or not governments implement discretionary policy
initiatives to tackle the problems associated with household debt. In the Scandinavian countries, despite a
significant buildup in household debt before the housing bust of the late 1980s, the authorities introduced
few new policies targeted at household debt. We argue that this lack of a policy response may reflect the
existence of substantial automatic fiscal stabilizers through the social safety net, in addition to variable
mortgage interest rates that quickly transmitted monetary policy stimulus to homeowners.
> An important element in the design of targeted policies is sufficient incentives for borrowers and lenders
to participate. For example, debt restructuring initiatives need to offer creditors and debtors a viable
alternative to default and foreclosure. The case of the United States during the Great Depression
demonstrates how specific provisions can be implemented to ensure that the lenders willingly accept the
government-supported modifications. In contrast, the case of the United States since the Great Recession,
where loan modifications may open the door to potential litigation by investors, illustrates how poorly
designed household debt restructuring efforts can result in low participation.
> Government support for household debt restructuring programs involves clear winners and losers. The
friction caused by such redistribution may be one reason such policies have rarely been used in the past,
except when the magnitude of the problem was substantial and the ensuing social and political pressures
considerable.
Summary:
...
Targeted household debt restructuring policies can deliver significant benefits. Such policies can, at a
relatively low fiscal cost, substantially mitigate the negative impact of household deleveraging on economic
activity. In particular, bold household debt restructuring programs such as those implemented in the United
States in the 1930s and in Iceland today can reduce the number of household defaults and foreclosures
and alleviate debt repayment burdens. In so doing, these programs help prevent self-reinforcing cycles of
declining house prices and lower aggregate demand. Such policies are particularly relevant for economies
with limited scope for expansionary macroeconomic policies and in which the financial sector has already
received government support.
However, the success of such programs depends on careful design. Overly restrictive eligibility criteria or
poorly structured incentives can lead to programs having a fraction of their intended effect. Conversely,
overly broad programs can have serious side effects and undermine the health of the financial sector (IMF
2012, pp. 106-115).
26
Appendix II: Extra data
Turkey
Estonia
Lithuania
Latvia
Poland
Sweden
Slovakia
Iceland
Macedonia
Austria
Germany
Finland
Montenegro
Romania
Switzerland
Malta
Belgium
United States
France
Czech Republic
Bulgaria
Hungary
Luxembourg
EU (27 countries)
Norway
Netherlands
Denmark
United Kingdom
Spain
Ireland
Cyprus
Italy
Croatia
Slovenia
Japan
Portugal
Greece
-6.9
-10
0
-0.2
-0.7
-1.6
-5
4.3
3.9
3.3
3.1
3
3
3
2.9
2.8
2.5
2.1
2.1
1.9
1.7
1.7
1.7
1.7
1.6
1.6
1.5
1.4
1.2
1
0.7
0.7
0.7
0.5
0.4
0
5.9
5.5
7.6
8.5
2011
2012
5
10
Change of GDP from previous year (%)
Figure A1: Economic growth rate (%) in 2011 and prospect for 2012.
Eurostat
25
22.3
19.8
20.2
20
19.5
20.1
19.8
18.1
17.9
17
16.8
16.4
17.4
17.5
17.2
2007
2008
2009
18.4
18.7
15
10
5
0
2004
2005
2006
Owner, paying mortgage
2010
2011
Tenant total
Figure A2: Housing cost as % of disposable earnings: home owners with debts and tenants. Total
net housing cost, debt burden and other housing expenditures, 2004-2011 (2010).
Statistics Iceland (2012).
27
110.7%
110.3%
115.0%
96.0%
100.3%
99.9%
99.3%
99.3%
99.4%
93.8%
94.2%
87.7%
93.4%
88.8%
96.0%
103.4%
100%
100.9%
108.5%
106.7%
109.4%
105.2%
120%
106.1%
140%
80%
60%
40%
20%
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
0%
Figure A3: Minimum pension guarantee (for a single old age penbsioner) as a % of minimum wages,
1990-2011
Social Security Administration
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