Austerity at the expense of working people
15. September 2025Austerity hurts working people
On the same day that the Central Bank Governor announced the Bank's decision to hold interest rates steady, the Minister of Finance stepped forward and announced increased austerity in public finances. In fact, the Central Bank made no mention of public finances when explaining its decision, as the current inflation is generally not believed to stem from government spending. However, political agenda is fixated on balancing the books by cutting down public expenses, hoping that — together with high interest rates — it will starve the economy into recovery, inflation will slowly crawl down, and interest rates along with it.
This approach is in line with a policy known in English as austerity, translated into Icelandic as niðurskurðarstefna. But it includes more than just government cutbacks; it also involves high interest rates and a tendency to cut the rights of working people. The problem is that this starvation strategy has never worked to fix public finances or get the economy on track. Instead, over time and in other countries, it has made the rich richer, reduced the middle class, and lowered the standard of living for working people.
This is not to say that the current economic policy is pure and unadulterated austerity, but the warning signs are there, and it is important to pause and examine the ideology behind it.
Undermining the rights of working people
Hardly anyone in Iceland has escaped noticing the lack of maintenance and development of infrastructure. The National University Hospital has operated at the highest emergency level for months due to a shortage of employees and hospital beds, vulnerable children are not receiving appropriate services in the education system, and there are far too many pothole-ridden roads.
Municipalities have resorted to selling land plots to fund their legally mandated tasks, which in turn drives up housing prices and fuels inflation — something most of us are paying dearly for.
All of this stems from political minimalism. In the end, such austerity can break down communities and lead to widespread support for political extremists who offer simple explanations for complex problems, such as blaming immigrants or other minorities for everything that goes wrong.
One of the most important tools in the fight against such social breakdown is strong and resilient trade unions that protect the rights of working people and public welfare, and ensure that increasing value creation benefits working people — not just business owners and capital.
However, the government's budget bill undermines the rights of working people. The Minister of Social Affairs plans to shorten the unemployment insurance period by a full year without consulting the labour movement. The minister promises activation measures and early intervention, something that has long fallen under the scope of the Directorate of Labour, though with mixed results.
This is starting at the wrong end — with punitive measures against working people rather than supportive ones. At the same time, the earning period for entitlement is to be extended, which again reduces the rights of working people.
Consultation after decisions are made
The government often refers to the shorter unemployment benefit period in the Nordic countries. Here we see the classic tactic of cherry-picking one factor that supports the case while ignoring numerous other factors that do not. In the Nordic countries, the entire welfare system for working people is structured differently and labour market stability is greater.
In Iceland, the general approach has been to maintain a flexible labour market, meaning it is uncomfortably easy to terminate employment, but rights to unemployment insurance are relatively strong. By unilaterally changing unemployment benefits, this balance — one of the foundations of the Icelandic labour market — is being undermined, without consultation with those who depend on it.
But why shorten the benefit period? On the one hand, because of the announced cuts, and on the other hand, to fund otherwise very positive and good changes to the disability pension system. At the same time, the government's contribution to equalising the disability burden between pension funds is being cut to zero — a unilateral action, in direct opposition to labour market agreements.
The result will be reduced pension rights for future retirees, especially those in the pension funds of manual workers. Just as the Minister of Social Affairs acts, the Minister of Finance calls for consultation — after the decision has been made.
Lack of ambition in housing matters
It became infamous when the current Prime Minister wielded a sledgehammer during the election campaign and vowed to smash inflation and interest rates. The Central Bank Governor had declared that wage agreements were the biggest uncertainty for interest rate cuts, but despite extremely moderate wage agreements, the high interest rate policy has continued—with enormous sacrifice for those in debt and those who rent.
Inflation is primarily rooted in mismanagement of the housing market, and yet we are still waiting for tangible measures. It is a positive step to place restrictions on short-term rentals and slightly strengthen tenants' rights, but at best this is comparable to a toy hammer — not a sledgehammer.
There is, of course, no magic solution to the housing issue, and democracy has limited influence over interest rate policy. Still, the government should do everything within its power — and the budget bill does not reflect great ambition in this area.
On the contrary, housing benefits are to be cut, and the only real measure that has been available to those with housing debt — the ability to use private pension savings to pay down mortgages — is being abolished. And nothing is offered in its place. This measure has its flaws, but the interest deduction system was essentially dismantled to fund it, and now that it's being zeroed out, nothing remains.
Major projects—but with what money?
Alongside the budget bill, the government has announced the development of an industry and employment policy for Iceland. It is very positive to undertake such a policy, and we at VR have already submitted feedback through the government’s consultation portal, emphasizing the creation of good jobs and ensuring that the benefits of technological changes go to working people and society.
An industry and employment policy cannot be developed without the voices of those who will be doing the work the policy concerns, which is why it is problematic that the Industry and Employment Policy Council is primarily composed of high-level business executives, investment bankers, and academics, rather than representatives of working people. Still, we trust that the consultation will be meaningful and not in the spirit of the earlier-mentioned approach, where decisions are made first and conversations follow after.
In relation to the industry and employment policy, the Prime Minister has announced major projects in all regions of the country. Infrastructure development is sorely needed, but these projects are nowhere to be seen in the budget bill.
There is therefore growing, well-founded concern that the idea is to have private investors finance the infrastructure—on the condition that they profit from it for decades to come. Such arrangements have almost without exception proven to be extremely costly for taxpayers and tend to lead to excessive user fees and high costs for households in the future. Infrastructure investment is essential, but how it is handled matters greatly.
Wage agreements on the line
When the last wage agreements were signed, the government committed to not passing increased costs onto working people through raised service fees. According to the budget bill, patient co-payments in the healthcare system are now set to rise by one billion ISK. This could mean significant added expenses for working people and is not in the spirit of the wage agreements.
General restraint and cutbacks have also, over the years, reduced services for working people and led to fee hikes and people having to travel farther to access services. The labour movement will not accept austerity and cutbacks being taken directly from the pockets of working people, who are already bearing heavy burdens due to the unstable economic situation.
Momentum must be used wisely
According to polls, there is considerable public goodwill toward the government. People want to give the administration a chance and allow it to prove itself. That is commendable and provides momentum that should be used wisely.
But if that goodwill is used to reduce the rights and living standards of working people, it is likely that the winds will shift strongly — and quickly.
The government is already approaching the end of the first quarter of its term, and working people are eagerly waiting for action. The time to lay the cards on the table is now, and hopefully, the hand contains more than the budget bill suggests.
Halla Gunnarsdóttir, Leader of VR
This article was first published in Heimildin in September 2025.