Crisis Policies in 2012 and Challenges Moving Forward

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Crisis Policies in 2012

and Challenges Moving Forward

Stefán Ólafsson

Working Paper no. 3: 2012
Þjóðmálastofnun – Social Research Centre,

University of Iceland

Executive summary
Up to 2008 Iceland had a good position on social inclusion and poverty alleviation. For a long time it had had one of the very highest employment participation rates amongst the advanced nations, very low unemployment, high employment participation of females, the elderly, single parents and people with disabilities. Its relative poverty rates were also amongst the lowest, as generally applied to the Nordic nations.

The financial collapse of 2008 changed that to some extent, but not as drastically as might have been expected given the extent of Iceland’s financial crisis. Even though Iceland’s unemployment rate tripled in a period of a few months it still remained below the EU average. The at risk of poverty and social exclusion increased from about 11.5% of households to about 13.7%, but still remained the lowest within the European community. While the rate for Icelanders however did not increase at all it increased quite drastically for immigrant workers, particularly immigrants from Poland. As it turns out the group of immigrants are the single groups most at risk of unemployment, poverty and social exclusion in Iceland now.

The social inclusion policy development in Iceland since 2008 was not particularly shaped by the Commission’s recommendation on active inclusion. The main policy formation from 2008 and through the crisis was determined by the crisis logic and quite clearly formulated already in the government’s manifesto from the spring of 2009.

The general policy goal was to shelter the lower and middle-income groups from the worst consequences of the crisis, with a touch of Nordic welfare policy mix. This was of course restrained by the appalling condition of public finances and the tough requirement of balancing the budget in a period of 4 years. The strategy of the government was to strategically redistribute the welfare expenditures and pursue an egalitarian policy on income support and facilitating re-inclusion of individuals excluded from the labour market by the crisis.

Benefits were targeted at lower income groups, tax burden on them was also relieved (while raised on higher income groups) and active inclusion measures in the labour market were greatly stepped up, including the use of the unemployment benefits fund to finance some of the activation measures, for example by paying unemployment benefits to individuals in some educational activities and by allowing for “part benefit-part paid work” and other similar options. The ALMP policies seem to be quite successful in getting individuals back to work.

In terms of the three strands of active inclusion policy as defined in the Commission’s recommendation from 2008, the services part was the hardest hit with expenditure cuts in Iceland, since the policy gave priority to transfer payments in the interest of saving jobs. Rationalizations and increased efforts were pursued in services, such as in health and education.

On the whole Iceland’s policy mix seems to have facilitated positive reactions against the crisis, resulting in less relative burdens on the lower income groups and a lower unemployment rate than became typical of the countries that were hardest hit by the financial crisis. Young families with children were however disproportionately hit by debt burden, but the government has now announced an increase in expenditures on child benefits by about 30% in 2013, which should serve that group particularly well.

The group most at risk of exclusion in Iceland are immigrants, particularly immigrants from Poland. It is recommended that immigrants in general should be specially targeted with new efforts on the social inclusion front.

Table of Contents

Executive summary

Introduction: The State of Affairs

1. Horizontal overview: Policy developments in 2012

1.1.1 Employment and activation

1.1.2 Adequate income measures

1.1.3 Access to quality services

1.1.4 Child poverty and child care

1.1.5 Housing exclusion and homelessness

1.1.6 Migrants and ethnic minorities

1.1.7 Old and young workers

2. Main gaps and challenges for reaching 2020 targets

3. Main drivers for reaching poverty and social inclusion targets
Appendix I: Extra data
Introduction: The State of Affairs at the Outset of 2012

Iceland’s crisis started with the decisive fall of the Icelandic Krona from end of 2007 throughout 2008. The collapse of the banking system in October 2008 is however the main symbolic event marking the start of the crisis. The GDP had stopped growing early in 2008 and went into contraction by third quarter. Unemployment went up from about 2% in the summer of 2008 to a top of about 8-9% (depending on surveyed or registered data) in 2009-10. The contraction of GDP was 6-7% in 2009 and another 4-5% in 2010. Real wages declined from March 2008 and bottomed out in April 2010. Real earnings declined more than real wages, due to added effects of reduced work volumes and increased debt burden also added to the financial difficulties of Icelandic families.

As can be seen from figure 1 real wages started to rise from May-June in 2010, then came down again in early 2011 but have continually climed up from then on.
Figure 1: Real Wage development by months, from 2007 through 2012 (September). Index: 2000=100.

Source: Statistics Iceland
By September 2012 about a half of what was lost in real wages has been regained, more so in the private sector than in the public sector.

So Iceland touched bottom by mid year 2010 and has been recovering since then. Average debt levels of households have also come down since 2009, due to strategic write-offs. Debt relief has also been greatly increased by means of a tax relief for interest cost of mortgages, amounting to about a third of the interest cost in 2010 and 27% in 2011 (Ólafsson, Kristjánsson and Stefánsson 2012).

As can be seen in figure 2 unemployment climed up quite drastically, from a very low level before the crisis, to a top in 2009-10 and has declined again and more sharply during the summer of 2012 leading up to September this year. The previous top unemployment level had been in 1992-5. The crisis, the cuts in real living standards and the unemployment, along with highly elevated debt problems, led to greatly increasing hardships for households in Iceland.

The government did however succeed in alleviating the worst consequences of the crisis for the lower and middle-income households, thus avoiding great increases in poverty rates and hardships, which might have been expected due to the severity of the crisis.

On the left hand side of figure 2 we show the proportion of households receiving social assistance from local authorities’ social services, as a proportion of all households (tax units). In general there has been a relatively close relationship between unemployment levels and the numbers of social assistance receivers, when unemployment goes up so does the number of social assistance receivers. Since social assistance is greatly means-tested the allocation of its benefit is only delivered if conditions are proven to be quite sever. So the proportion of S-A receivers can be taken as a good indicator of absolute poverty in Iceland.

The lesson of the data is that while the S-A receivers’ rate generally goes up with increased unemployment there is a significant divergence during the present crisis, with the S-A receivers’ rate not rising as fast as might have been expected from the steep climb of the unemployment rate. We take this as an indication of successful governmental policies for alleviating poverty and financial hardships at the lowest level with crisis-countering policies aimed at the lower income groups.

Figure 2: Receivers of social assistance (% of households) and unemployment rates (% of labour force – left diagram) and poverty rates (%) before and after social transfers (right diagram).

Source: Statistics Iceland
This poverty alleviation effort can be detected in the diagram on the right hand side of the figure, showing the 60% poverty level for the total population before and after social transfers. The pre-transfer poverty rate went from 26% in 2006 up to 35% in 2010, but the after-transfer rate actually came down after the onset of the crisis, from about 10% to 9.2%. So without the extra effort at poverty alleviation the relative poverty level would have doubled, but instead came down by about 1 %-point.

In figure 3 we show both development of 60% and 40% relative poverty rates and some indicators of financial hardship. The 60% poverty rate came down a little as already indicated but the 40% poverty rate increased from 2.2% to 3.1%. So there was an increase in the size of the group of the very poor. But when we look at the picture of financial hardships we see a much larger increase in the number of households finding it very difficult to make ends meet (from 6% in 2007-8 to 13.7% in 2010 and 13.3% in 2011. So the rate more than doubled. Similarly we see a doubling of the proportion of households saying payments of other loans (i.e. consumer loans) is a heavy burden and arrears on such loans went from 5.5% in 2008 to 13.1% in 2010. The climb in arrears on mortgages or rent payments did not increase as fast.

Figure 3: Poverty and financial hardship developments through the crisis.

Source: Statistics Iceland

Another interesting feature of the indicators on financial hardship is that they generally show a decline again in 2011. That development is in line with the messages we are getting from wage development, economic growth and private consumption indicators, refecting the turnaround that was effected from late 2010 and consolidated in 2011 and 2012. We should accordingly expect the indicators of financial hardship for 2012 to be lower, in line with the recovery.

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