Economy of Iceland

The economy of Iceland is small and subject to high volatility. Iceland has a mixed economy with high levels of free trade and government intervention. However, government consumption is less than other Nordic countries. Hydro-power is the primary source of home and industrial electrical supply in Iceland.

Top Sectors in Iceland

Tourism in Iceland

Tourism is Iceland's largest export sector by far. Tourism accounted for more than 33% of the country's GDP in 2019. Iceland is one of the most tourism dependent countries on earth. In October 2017 the tourism sector directly employed around 26,800 people, with the total number of employees in the country being 186,900. Since 2010 tourist arrivals in Iceland have increased by 378%.

Manufacturing in Iceland

Iceland is the world's largest electricity producer per capita. The presence of abundant electrical power due to Iceland's geothermal and hydroelectric energy sources has led to the growth of the manufacturing sector. Power-intensive industries, which are the largest components of the manufacturing sector, produce mainly for export.

Aluminium in Iceland

Aluminium smelting is the most important power-intensive industry in Iceland. There are currently three plants in operation with a total capacity of over 850,000 metric tons per year (mtpy) in 2019, putting Iceland at 11th place among aluminium-producing nations worldwide. Rio Tinto Alcan operates Iceland's first aluminium smelter (plant name: ISAL), in StraumsvÃk, near the town of HafnarfjÃ¶rÃ°ur. The plant has been in operation since 1969. Its initial capacity was 33,000 mtpy but it has since been expanded several times and now has a capacity of about 189,000 mtpy. The second plant started production in 1998 and is operated by NorÃ°urÃ¡l, a wholly owned subsidiary of U.S.-based Century Aluminum Company. Its former capacity was 220,000 mtpy but an expansion to 260,000 mtpy has already finished. United States-based aluminium manufacturer Alcoa runs a plant near the town of ReyÃ°arfjÃ¶rÃ°ur. The plant, known as FjardaÃ¡l (or "aluminium of the fjords"), has a capacity of 346,000 mtpy and was put into operation in April 2008. To power the plant, Landsvirkjun built KÃ¡rahnjÃºkar, a 690-MW hydropower station. The project was enormous in the context of the Icelandic economy, increasing total installed electric power capacity from under 1,600 MW to around 2,300 MW.

Fisheries in Iceland

The fisheries sector directly employs around 9,000 people (4,900 in fishing and 4,100 in fish processing; approximately 5 per cent of Iceland's workforce), although it is estimated that a total of between 25,000 and 35,000 people (up to 20 per cent of the workforce) depend on the ocean cluster for their livelihood. Many of these jobs are provided by technological companies that manufacture equipment for fisheries firms and by companies engaged in the advanced processing of marine products or in biotechnical production. By contrast, aquaculture remains a very small industry in Iceland, employing only around 250 people for a production of 5,000 tonnes.

Iceland - Key Economic Indicators

Exports & Imports

Iceland's main exports are aluminum, fish products, and ferroalloys. They primarily export to the Netherlands, United Kingdom, and the United States. Imports include machinery, fuels, and consumer goods, with main import partners being Norway, Denmark, and Germany.

Infrastructure

Iceland has a well-developed road network for its population size, with roughly 13,000 kilometers of paved roads. The government also invests in geothermal and hydropower plants for renewable energy.

Fiscal Policy

Iceland has a welfare state with high government spending on social programs. The government aims to balance its budget over the long term and uses a mix of taxes, including income, value-added, and social security taxes, to fund spending.

Monetary Policy

The Central Bank of Iceland (CBI) is responsible for monetary policy, aiming for price stability and financial stability. They use tools like setting interest rates and reserve requirements for banks.

Trade Agreements

Iceland is a member of the European Free Trade Association (EFTA) and the European Economic Area (EEA), granting them access to the European market without full EU membership.

Environmental Regulations

Iceland has strict environmental regulations to protect its unique natural environment. These regulations focus on areas like pollution control, sustainable fishing practices, and renewable energy use.

Tax system

Capital gains tax: The capital gains tax rate in Iceland is a flat 22%. This applies to profits earned from the sale of assets such as stocks, bonds, and real estate.
Corporate tax rate: Iceland has a low corporate tax rate of 20% for limited liability companies and limited partnership companies. This is one of the lowest rates in the world and is intended to attract foreign investment.
Sales tax: Iceland has a standard value-added tax (VAT) rate of 24% [3]. However, there is a lower rate of 11% for certain goods and services, such as groceries and public transportation.
Property tax: Property taxes in Iceland vary depending on the location and type of property. The tax is based on the property's assessed value, which is typically determined by its size, location, and condition.
Payroll tax: In Iceland, both employers and employees contribute to a payroll tax that funds the country's social security system. The employee contribution rate is 4.9%, and the employer contribution rate is 2.46%. There is also an additional health insurance contribution of 2.0% paid by employees.
Tax deductions and credits: Iceland offers a number of tax deductions and credits that can help reduce your tax liability. These include deductions for interest on mortgages, charitable donations, and child care costs.
Tax compliance: Iceland is considered to have a very efficient tax collection system, with a high collection rate. This is due in part to the fact that the tax system is relatively simple and there are few loopholes.
Tax burden: The overall tax burden in Iceland is moderate compared to some other European countries. This is due to the low corporate tax rate and the availability of tax deductions and credits.

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