Tag: iceland

Iceland, Switzerland, and the Golden Rule of Fiscal Policy

Being a glass-half-full kind of guy, I look for kernels of good news when examining economic policy around the world. I once even managed to find something to praise about French tax policy. And I can assure you that’s not a very easy task.

I particularly try to find something positive to highlight when I’m a visitor. While in the Faroe Islands two days ago, for instance, I wrote about that jurisdiction’s new system of personal retirement accounts.

And now that I’m in Iceland, I want to focus on spending restraint.

As you can see from this chart, lawmakers in this island nation have done a reasonably good job of satisfying the Mitchell Golden Rule over the past couple of years. Nominal economic output has been growing by 6.1 percent annually, while government spending has risen by an average of 2.8 percent per year.

Iceland Spending Restraint

If Iceland continues to enjoy this level of growth and can maintain this modest degree of fiscal discipline, the burden of government spending will soon drop below 40 percent of GDP.

Where’s Our Bailout Vote?

It’s easy to forget that the financial crisis was not simply one of American financial institutions getting into trouble; banks around the world found themselves on the brink of failure.  One of the more interesting cases is Landsbankinn, a privately owned bank in Iceland.  Landsbankinn also operated a branch in Britain and the Netherlands called “Icesave.”  When Icesave failed in 2008, the British government rushed in and covered the deposits of its British savers — a move that was neither requested by Landsbankinn or the government of Iceland.  Now the Brits are demanding that Iceland pay them to cover those expenses.

For a brief moment it looked like that was exactly what was going to happen, as the legislature in Iceland passed a bill to pay off the Brits.  Sensing the public opposition, Iceland’s president blocked the bill.  This is likely to lead to a public vote by the people of Iceland on whether they want to cover the losses of British depositors in Icesave. 

Britain had no legal basis for seizing Icesave assets in the UK, nor did depositors in Icesave have any right to have their losses covered.  If England wants to bail out its citizens, that is its business.  Asking Iceland to foot the tab afterwards sets a dangerous precedent.

But then at least the citizens of Iceland are getting a vote on whether to bail out or not.  By comparison, both U.S. Treasury Secretaries Paulson and Geithner have decided that U.S. taxpayers must honor foreign investments in Fannie Mae and Freddie Mac, even if those investments were explicitly not insured by the U.S.  government.  Perhaps the U.S. could learn a little about democracy and accountability from Iceland.

Using Gasoline to Douse a Fire? OECD Thinks Higher Tax Rates Will Help Iceland’s Faltering Economy

Republicans made many big mistakes when they controlled Washington earlier this decade, so picking the most egregious error would be a challenge. But continued American involvement with the Organization for Economic Cooperation and Development would be high on the list. Instead of withdrawing from the OECD, Republicans actually increased the subsidy from American taxpayers to the Paris-based bureaucracy. So what do taxpayers get in return for shipping $100 million to the bureaucrats in Paris? Another international organization advocating for big government.

The OECD, for example, is infamous for trying to undermine tax competition. It also has recommended higher taxes in America on countless occasions. And now it is suggesting that Iceland impose high tax increases - even though Iceland’s economy is in big trouble and the burden of government spending already is about 50 percent of GDP:

Both tax increases and spending cuts will be needed, although the former are easier to introduce immediately. The starting point for the tax increases should be to reverse tax cuts implemented over the boom years, which Iceland can no longer afford. This would involve increases in the personal income tax… Just undoing the past tax cuts is unlikely to yield enough revenue. In choosing other measures, priority should be given to those that are less harmful to economic growth, such as broadening tax bases, or that promote sustainable development, such as introducing a carbon tax.