The collapse and success of the restoration

Abstract

This study outlines the characteristics of the Icelandic financial crisis and asks what influence it has had on the level of living of the population. The main focus is on policies for tackling the consequences of the crisis. The analysis is put into the context of Keynesian demand management and Austrian laissez-faire crisis management strategies. The conclusion is that Iceland’s resurrection was relatively successful, compared to other deepcrisis countries. The special characteristic of the Icelandic strategy was a combination of expenditure cuts, tax hikes and a strong redistribution focus of welfare efforts. Welfare expenditures became more directed at lower income groups, while higher income groups got cuts; transfers to the households were increased while expenditures on services (previously at a high level) were cut. Benefits aimed at the lowest income groups were increased specifically, in order to avoid increasing poverty. The same pattern applied to direct taxation changes, i.e. effective tax burden was transferred from lower income households to higher income ones and to firms. The labor market partners raised the minimum wage specifically in collective agreements, while average wages remained at nominal values (at the same time that prices rose rapidly). The government also imposed a special temporary wealth tax on net assets above a defined sum. Lastly, the government implemented debt relief measures, serving lower and middle-income households disproportionally. Incomes distribution became much more equal in the aftermath of the collapse, partly due to this redistributive strategy of crisis policies.