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- GDP (PPP):
- $12.4 billion
- 3.1% growth
- -0.2% 5-year compound annual growth
- $38,061 per capita
- Inflation (CPI):
- FDI Inflow:
Iceland’s economic freedom score is 72.1, making its economy the 23rd freest in the 2013 Index. Its overall score is 1.2 points better than last year, due primarily to substantial efforts to rein in government spending. Iceland is ranked 13th out of 43 countries in the Europe region, and its overall score remains well above the world and regional averages.
Though hit sharply during the financial crisis, Iceland is well into the process of recovery. The quality of the legal framework remains among the world’s highest, providing effective protection for property rights. The rule of law is well maintained, and a strong tradition of minimum tolerance for corruption is firmly in place.
Iceland has demonstrated a strong commitment to restoring the soundness of public finance and the credibility of its policies. However, the emergency economic measures, including capital controls, implemented by the government during the financial crisis are being unwound only slowly and constitute a serious barrier to economic freedom that threatens future growth. A dependable commitment to regulatory efficiency and open-market policies underpins efforts to restore positive momentum.
The collapse of Iceland’s banking sector in 2008 sparked a currency crisis and a substantial contraction of the economy. Social Democrat Prime Minister Johanna Sigurðardóttir’s government won a parliamentary vote in favor of applying for membership in the European Union, reversing a long-held policy. Accession talks began in June 2010, but the government must win a mandatory public referendum, and the British and Dutch governments have threatened to veto Iceland’s accession because of a debt dispute resulting from the collapse of Iceland’s Landsbanki in 2008. Iceland already enjoys EU-related benefits that include free trade and movement of capital, labor, goods, and services within the EU, as well as membership in the Schengen zone, which allows visa-free travel in 26 European countries.
Private property is well protected. The constitution provides for an independent judiciary, and trials are generally public and fair. Iceland is one of the few countries with efficient, property rights–based fisheries management. Isolated cases of corruption are not an obstacle to foreign investment. A 1,000-year history of parliamentary government has encouraged the institutionalization of accountability and transparency.
The top income tax rate is 31.8 percent, and the flat corporate tax rate is 20 percent. Other taxes include a value-added tax (VAT) and an estate tax. The overall tax burden is 36.3 percent of total domestic income. Government spending has fallen to 46.1 percent of total domestic output. The deficit has declined to below 5 percent of GDP as Iceland recovers from its financial crisis, but public debt is equivalent to a full year’s GDP.
The overall regulatory environment continues to be efficient and competitive. Starting a business takes five procedures and five days on average and costs about 3 percent of the level of average annual income. Bankruptcy proceedings are relatively easy. Labor regulations are rigid, with broad wage settlements and high unionization. Inflation has diminished, in part as a result of falling nominal wages.
The trade-weighted average tariff rate is a very low 1.1 percent, but modest non-tariff barriers add to the cost of trade. The investment regime is open and supports vibrant investment growth. The central bank has eased only some of the restrictions on the movement of capital that were instituted following the financial turmoil in 2008, but Iceland has recapitalized its banking system and returned to the global bond market.