Economic Policy Reforms 2023

Iceland

See more data for Iceland on the related dashboard.

Product and labour markets functioning

Performance gaps

• Barriers to entry are high for both domestic and foreign firms, hampering sound competition.

• Considerable administrative burdens for new companies protect incumbents and restrict the entry and growth of innovative start-ups.

• Regulation of professional and personal services is also relatively restrictive. Many activities require multiple professional designations, compounding the burden on professional entrants, especially in tourism and construction.

Recommendations

• Reform the regulatory framework in the tourism and construction sectors to facilitate entry of new and innovative firms.

• Ease or remove stringent occupational licensing to facilitate access to professions.

• Increase openness by easing restrictions on foreign-owned companies, public procurement, and auditing.

Digital transition

Performance gaps

• Iceland has an excellent digital infrastructure, with the fibre network ranking at the top of European countries. However, digital uptake of firms, especially small ones, often remains weak, partly because the education system provides relatively few digital skills.

• The scope of digital government lags the OECD.

Recommendations

• Foster digital skills by broadening education programmes at the secondary and tertiary level, particularly in vocational education and training.

• Strengthen collaboration between research and businesses, including specific programmes that connect smaller firms with researchers.

Inclusiveness, social protection, and ageing

Performance gaps

• Iceland has the most equal income distribution in the OECD thanks to highly equal wages and a well-targeted tax and social benefit system. However, marginal tax rates for low- and middle-income earners are high. The large difference in working hours between men and women brings about a considerable gender wage gap.

• Spending on disability is high.

Recommendations

• Reduce high marginal tax rates on second earners, often women, for instance by moving towards a universal child benefit.

• Continue the reform of the disability benefit system, putting emphasis on returning to and remaining in work.

Climate transition

Performance gaps

• Although Iceland relies far more on renewable energy than any other OECD country, greenhouse gas emissions are above average and hardly declining. Carbon pricing is above the OECD average, but geothermal energy generation and agriculture are exempt. Investment in research and development and in low-carbon infrastructure is relatively weak.

Recommendations

• Submit all sectors outside the European emission trading system to carbon pricing, considering interactions between carbon taxes and emissions trading.

• Step up spending on low-carbon transport infrastructure, energy transition and digital transformation.

Overall performance