Iceland considers extending fuel VAT cut amid inflation concerns

Iceland's Prime Minister Kristrún Frostadóttir announced that the government is considering extending the temporary reduction of the value-added tax (VAT) rate on fuel. This measure is being evaluated as a way to manage inflation and its impact on the labor market.

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This is just something we are looking into at this point. It is a costly measure, but it also affects the index.

Frostadóttir acknowledged that the Central Bank's recent interest rate hike was a disappointment. However, she defended the government's fiscal policies, stating that government spending as a percentage of GDP is not expanding and that revenues are in line with the financial plan. She emphasized that the government is committed to fiscal prudence and maintaining stability.

The Prime Minister addressed concerns about potential tax increases, noting that some government services require funding and that certain prices have not kept pace with inflation. She indicated that while direct tax reductions are possible, they would necessitate offsetting measures to maintain fiscal balance. Frostadóttir also highlighted the psychological impact of discussions around taxes on public expectations and inflation perceptions.

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We thought we were in a better place regarding the anchor of inflation expectations last December. I think the Central Bank experienced the same.

Reflecting on past inflation trends, Frostadóttir admitted that the government might have been overly optimistic when inflation fell below 4% at the end of the previous term. She cited external factors, such as the conflict in the Persian Gulf, as contributing to recent inflationary pressures. The government's priority now is to restore public confidence, with balanced budgets being a key strategy for the upcoming fiscal year.

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So now we have the task of increasing public trust again in this project, and the biggest single line in that will be a deficit-free budget this fall.