Economic statistics - 01.05.1986, Side 3

ECONOMIC STATISTICS
Vol. 7.2. May 1986
Published quarterly by the Economic Department of the
Central Bank of lceland, P.O. Box 160,121 Reykjavík, lceland.
ISSN 0256-193X
Economic prospects in 1986:
INFLATION DOWN TO A SINGLE DIGIT
Economic prospects improved markedly during
the first months of the year. Economic growth wiil
continue for the third successive year, bringing
national income per capita above its former peak
level in 1981. Inflation will be in a single digit for the
first time since 1971. This favourable development is
mainly due to a marked improvement in the terms of
trade and moderate wage settlements in February.
The wage settlements
The improved prospects for national income
growth made it possible to reach overall wage settle-
ments on the labour market, that were consistent
with a declining rate of inflation and increasing real
wage rates over the contract period to the end of this
year. This required a tripartite overall settlement
involving the Government, the unions and the em-
ployers. The basic ingredients of the settlement were
a continued restrictive exchange rate policy, fiscal
measures intended to reduce price inflation and
costs, a new system of housing finance, reform of the
pension fund system and finally wage increases
consistent with single digit inflation.
The wage contracts provided for 5% increase in
wage rates as of signing, 21/2% on June 1,3% on
September 1 and 21/2% on December 1. The con-
tracts also provided for lump-sum payments to the
lowest paid in April and June equivalent to 2-3% of
their average annual earnings. These wage increas-
es were based on the premises, that the increase in
the cost of living would not exceed 2.5% from Janu-
ary to May, 4.4% from January to August and 6.1 %
from January to November. Arbitration committees
of both partners will in each case decide on com-
pensation if these ceilings are surpassed, taking into
account changes in economic conditions such as the
term of trade and GNP.
The agreements had clauses on increased contri-
butions to pension funds to be introduced gradually
over the years 1987-1990. Contributions will be
based on total wage earnings including overtime and
bonus payments instead of only daytime wage earn-
ings as of now, whereof employees pay 4% and
employers 6%. The Federation of Labour and the
employers organizations also agreed to set up a
committee to review the wage system with the aim of
reducing the disparity between wage rates and earn-
ings. The same organizations will set up a committee
to review the system of sickness and accident pay-
ments. Finally, an agreement was reached on
proposing a new system of housing finance to the
Government, but lower real incomes, higher real
interest rates and the prevalence of short maturities
on bank and private lending for housing finance had
seriously undercut the viability of the old system and
created social tensions especially during the las
three years.
The Government measures
Concomitantly with the signing of the wage con-
tract between the Federation of Labour and the
employers organizations the Government issued a
declaration on measures intended to support the
wage settlements and then promptly got Althing (par-
liament) to adopt the necessary legislation. This
declaration was a precondition on behalf of the
negotiators for reaching a settlement. The main
points of the economic policy package are:
- The Government intends to keep the exchange
rate more or less stable at its end of January level at
least to the end of the year, provided the terms of
trade and other economic prospects do not take a
turn for the worse.
- The Government and the Central Bank declared
their intentions to reduce nominal interest rates
immediately following new wage settlements con-
sistent with single digit inflation. Interest rates con-
trolled by the Central Bank have since been reduced
twice, first on March 1, when for example interest
rates on general bonds went down from 32% to
20%, and again on April 1, when the general bonds
rate went down to 15.5%.
- The Government reduced income taxes levied on
1985 incomes but paid out of 1986 incomes and
declared that public services and utilities charges
would be revised on the basis of lower inflation.
- The Government took various measures directly