The OECD report recommends that Iceland reform its fiscal framework to enhance sustainability and reduce economic volatility.
The Organisation for Economic Co-operation and Development (OECD) has published a report on 26 June 2025, advising Iceland to reform its fiscal framework to promote sustainability and minimise economic volatility.
The Icelandic economy is rebalancing. It is recovering as monetary policy eases and exports expand, but risks are high. Strong fundamentals helped the country to become one of the wealthiest and most egalitarian. However, to spur growth and keep up high living standards, Iceland needs to reform the fiscal framework, improve compulsory education, expand electricity generation, and streamline business regulation.
Iceland, a wealthy and egalitarian OECD nation, faces economic challenges despite recovering momentum. Inflation remains above the 2.5% target, the labour market is tight, and wage growth is strong. Fiscal policy has been pro-cyclical, with slow deficit reduction, highlighting the need for expenditure rules and spending reviews. To boost foundational skills, national student tests, curriculum focus, improved teaching quality, and Icelandic programs for immigrant children are essential. Expanding the electricity supply via streamlined procedures and reducing regulatory barriers in markets and professional services are crucial for productivity growth. Enhancing business dynamism requires easing entry restrictions and creating a level playing field.
The key recommendations include:
- Improving tax and public spending efficiency, addressing labour market and skills mismatches, investment in housing, and better integration of immigrants would help maintain economic growth and high living standards.
- A comprehensive initiative to improve compulsory education, including the reintroduction of standardised testing, a more focused curriculum, higher-quality teaching, and an expansion of Icelandic language programs for immigrant children, is necessary to improve foundational skills again.
- Expanding electricity generation and transmission by accelerating and simplifying the licensing process for new power projects, gradually expanding the wholesale market, and introducing demand-dependent pricing are needed to secure an efficient green transition and maintain energy security.
- Reducing administrative and regulatory burdens for market entry and exit, including foreign direct investment and non-tariff trade barriers, and ensuring a level playing field in the market, is essential to enhance business dynamism and boost productivity growth.
