Iceland Must End Fiscal Aid for Economy, Central Bank Chief Says
Iceland’s central bank governor wants an end to fiscal stimulus there “as soon as possible” to help cool the economy as it enjoys a buoyant post-crisis recovery laced with inflation.
Tax revenue has recovered “much” faster than projected by the central bank, and even though budget measures to help the tourism-dependent island have been smaller than anticipated, support should now cease, Sedlabanki Governor Asgeir Jonsson said in an interview in Reykjavik.
“The private sector is recovering so quickly now that the public sector needs to withdraw,” he said. “We think that the government should now think of closing the fiscal gap.”
The governor spoke a day after raising Iceland’s benchmark interest rate for a third time this year to tame stubbornly high inflation. The north Atlantic economy has been in the vanguard of advanced nations withdrawing monetary support and has the highest borrowing costs in western Europe, at 1.5%.
In March, the finance ministry forecast the 2021 budget deficit at 10.2% of gross domestic product, following a 6.6% gap last year. It forecast a “gradual” improvement in coming years “until the primary balance turns positive in 2025.”
“We have had good news concerning both the tourist sector recovery, with a lot of demand coming from the U.S., and also we see the fishing sector recovering quite rapidly,” Jonsson said. “So there are quite positive signs everywhere basically, but in terms of inflation that could actually be a problem.”
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