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- GDP (PPP):
- $12.8 billion
- 1.6% growth
- -1.1% 5-year compound annual growth
- $39,224 per capita
- Inflation (CPI):
- FDI Inflow:
Iceland’s economic freedom score is 72.4, making its economy the 23rd freest in the 2014 Index. Its overall score is 0.3 point better than last year, with improvements in six of the 10 economic freedoms, including investment freedom and freedom from corruption, overcoming declines in the management of government spending and business freedom. Iceland is ranked 13th out of 43 countries in the Europe region, and its overall score remains well above the world and regional averages.
Iceland’s economic freedom was first assessed in the 1997 Index, and its economy has been largely rated “mostly free.” Gains in four of the 10 economic freedoms, including business freedom and fiscal freedom, which have improved by more than 10 points, have helped Iceland’s overall economic freedom to advance by about 2 points over its history in the Index.
Iceland has demonstrated a strong commitment to restoring sound public finance and policy credibility. Regulatory efficiency and open-market policies underpin efforts to restore positive momentum. However, the emergency economic measures, particularly capital controls, implemented by the socialist government during the financial crisis are being unwound only slowly and constitute a serious barrier to greater economic dynamism.
The collapse of Iceland’s banking sector in 2008 sparked a currency crisis and a substantial contraction of the economy. The pro–European Union Social Democrats lost the April 2013 parliamentary elections. Sigmundur Davíð Gunnlaugsson of the Progressive Party was elected prime minister in a coalition government consisting of the Progressive Party and Independence Party. The new governing coalition indefinitely suspended accession talks with the EU in May 2013. In order to join the EU, the government must win a public referendum, and public opinion remains divided. Iceland already enjoys EU-related benefits that include free trade and movement of capital, labor, goods, and services within the region. It also has membership in the Schengen zone, which allows visa-free travel in 26 European countries.
Corruption is not a serious problem, although there have been a few politically tinged business-fraud scandals in recent years. A 1,000-year history of parliamentary government has engendered the institutionalization of accountability and transparency. Private property is well protected. The constitution provides for an independent judiciary, and trials are generally public and fair.
The top individual income tax rate is 31.8 percent, and the top corporate tax rate is 20 percent. Other taxes include a value-added tax (VAT) and an estate tax. The overall tax burden is 36 percent of gross domestic income. Government expenditures equal 47 percent of the domestic economy. Iceland continues to emerge from austerity brought on by the financial crisis, but public debt remains near 100 percent of GDP.
The regulatory regime continues to sustain innovative business formation and operation. 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. Despite the challenging economic situation, monetary stability remains relatively well maintained.
Iceland’s average tariff rate is only 1 percent, but trade barriers restrict imports of meat and dairy products. Capital controls that were put in place in 2008 have discouraged foreign investment, but they have been slated for elimination. The financial sector remains dominated by banking. After a period of intense strain, the banking sector has been largely recapitalized, and Iceland has returned to the global bond market.