An Overview of Social Inclusion Developments in Iceland, from 2007 to 2012

by Stefán Ólafsson

Working Paper no. 2: 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

Part 1. The Inclusion Position and Strategies

1. Inclusion Strategies:

1.1 Integrated comprehensive strategies1.1.1 Comprehensive policy design1.1.2 Integrated implementation 1.1.3 Vertical policy coordination1.1.4 Activeparticipation of relevant actors

2. Description and Assessment of Impact and Cost Effectiveness

2.1.1 Adequate income support2.1.2 Inclusive labour market2.1.3 Access to quality services

Part 2. Resources, Evaluations and Recommendations

3. Financial Resources

3.1.1 National resources3.1.2 Use of EU structural funds

4. Monitoring and Evaluation

5. Recommendations

5.1.1 Priority actions for the comprehensive active inclusion starategy5.1.2 Prioritiesfor each of the three strands5.1.3 Priorities for the EU level

Appendix I: Extra dataAppendix II: Overview of debt relief measures

References

Part 1. The Inclusion Position and StrategiesIt is useful to outline briefly the position of social inclusion issues in Iceland as of 2008, that is before the onset of the financial crisis, before we map the developments from then on.

Iceland had had a very high level of employment participation for decades leading up to the crisis. The employment ratio was generally in the region of 83-85% of people at working ages, the highest amongst the advanced nations. Similarly unemployment had been amongst the lowest for decades. The overall level of unemployment had however increased from the early 1990s onwards, yet still remaining amongst the very lowest until 2008.

This high employment participation rate is often associated to a positive work ethic amongst the Icelanders but rapid economic development from the 1960s onwards produced a work intensive labour market with a high level of demand for labour (Ólafsson 1996; Ólafsson and Stefánsson 2005). Hence ample opportunities for work tended to be the rule except for short recession periods. Both various supply and demand conditions favoured a high employment participation rate.

Such a high participation rate could not have been upheld for longer periods unless some social groups that tend generally to be marginal in labour markets had been highly included in the Icelandic labour market. This has indeed been so.

Employment participation of women has been at a very high level for a long time (Ólafsson and Stefánsson 2005).

People retire from the labour market generally late in Iceland. According to recent OECD statistics the average age of effective retirement (age at exit from labour market) is 69.7 for males and 66.4 for females (OECD 2012- http://www.oecd.org/statistics/; see also The Finnish Centre for Pensions 2008:2).

People with disabilities have one of the highest employment participation rate within the OECD, or around 60% (Hannesdóttir et.al. 2010). Many of them are however in part-time work. The average for the OECD-countries is significantly lower, or close to 45%.

Sickness absence rates are generally lower than in the other Nordic nations (Ólafsson 2008).

Long-term unemployment rates have generally been low and so have youth unemployment rates (Andersen et.al. 2011).

So prior to the crisis which started in 2008 Iceland had a generally quite good social inclusion position as regards labour market participation.

Before we start profiling the strategies applied during the crisis we give a short account of how Iceland seems to be doing on a few strategic indicators of social incusion from immediately before the crisis and during 2010, which is the time point at which the depth of the recession effects was reached (by mid year).

Eurostat figures on risk of poverty or social exclusion for 2010 indicate that Iceland is the country with the lowest risk on these combined factors, or 13.7%. The average for the EU was 23.5%. Iceland’s rate had gone up from about 11.5% in 2007, yet it kept its place at the top of the league. That indicates that Iceland had a relatively good success in containing poverty and exclusion risks during the crisis. Given the size and severity iof the Icelandic financial crisis that seems to be a rather remarkable outcome.

In figures 1 and 2 we show similar indicators for sub-groups of the population that are particularly prone to exclusion and poverty risks. First, in figure 1, we show the risk of poverty and social exclusion for lowest income group (the lowest income quintile).

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Figure 1: At risk of poverty or social exclusion: Low income households (lowest quintile), 2007 and 2010.

Iceland increased the rate of this risk for this group only marginally from 2007 to 2010 and shares the top position (with the lowest risk rate) with the Czech Republic, just above Netherlands, Norway, Austria and Sweden.

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Figure 2: People living in households with very low work intensity, 2007 and 2010. Iceland and EU countries compared.

In figure 2 we show the proportion of people living in households with very low work intensity, according to Eurostat definition. Iceland’s rate more than doubled, from the very lowest in Europe in 2007 to 5.6% in 2010, which puts Iceland in the fourth lowest seat. Unemployment went from 1-2% before the crisis to 7-8% when it topped, so that was a big change, even though Iceland’s rate remained lower than the EU average through the crisis. As figure 2 shows this happened

without dramatically changing the number of households with very low work intensities. The high employment participation rate of females, and hence the high rate of dual-earner households, provede to be a significant asset during the crisis. For about 9 out of 10 persons that were landed in unemployment there was another earner in the household that kept his/her job.

So the indication is that while Iceland was falling into the crisis from a good position of low poverty and social exclusion risk, it also seems to have succeeded relatively well in containing or counteracting increasing poverty and exclusion, despite the severe blow to the country’s finances and economy that the crisis inflicted.

One significant problem however has emerged during the crisis. That concerns the position of immigrants. Af seen in figure 3 the risk of poverty or social exclusion amongst immigrants has increased significantly, while the same thing has not happened amongst Icelandic nationals.

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Figure 3: Proportion at risk of poverty or social exclusion: Icelanders and immigrants compared, 2005 to 2010.

This is an issue of great significance not least since the number of immigrants increased greatly during the years of the bubble economy (2003 to 2007).

Now we turn to the account of the inclusion strategies

1. Inclusion Strategies:

1.1 Integrated comprehensive strategies

Since Iceland was not a member nor an applicant for membership of EU in 2008 the Commission’s recommendations from 3rd October 2008, on active inclusion of people excluded from the labour market, has not figured specifically in Icelandic policy-making. Application for membership in 2009 has not changed that. The policy environment for inclusion of marginal groups in Icelandic society is however quite comparable to the spirit of the Recommendation. This is due to the fact that the Nordic welfare policy emphasis which has to a considerable extent prevailed in Iceland longer-term has to some extent a similar emphasis on a number of issues relating to adequate income support, inclusive labour market and access to quality services. While the Icelandic welfare state has had some deviant characteristics, mainly as regards extensive use of income-testing of benefits in the social security system, it shares many of the

Scandinavian features of welfare services. Iceland has also for a long-term had an outstanding success in the area of inclusive labour market (Ólafsson 1999).

1.1.1 Comprehensive policy design

The general policy design in the area of social and economic inclusion has thus been developed in the context of an emhasis on general welfare policies. From 2008 the context has further and more specifically been defined by the financial crisis which hit Iceland during 2008 and culminated in the collapse of the major banks in October of that year. In the wake of that followed a major economic crisis with great cuts in real disposable earnings, increasing unemployment and increased debt burdens for government, firms and households.

While it would be too much to say that there has been formed a comprehensive and integrated policy on social inclusion in Iceland the policy environment still has many characteristics of a comprehensive nature. This is due to the fact that even though progress on individual fronts concerning issues of social inclusion (adequate income, inclusive labour market and quality services for all) has generally been done in a piecemeal fashion over time, the policy environment is neither ignorant nor aversive to the importance of coordination in policy-making. This is particularly important since the policy environment in Iceland is characterized by a very high degree of consultations and corporatism (Andersen et.al. 2011; Ólafsdóttir 2008).

The policy package formed to combat the crisis in Iceland was defined by the incoming government of the Social Democratic Alliance and the Left-Greens, which got a majority in the election of April 2009. The same government had served as an interrim minority government from February 1st to the election. The government was in fact the first Scandinavian-type of a social democratic government since Iceland’s independence in 1944. Previous left governments had all been coalitions across the center and usually under the leadership of the right of center Progressive Party (formerly the farmers’ party).

So the incoming government defined itself as a Nordic Welfare Government, aiming to shelter in particular the lower and middle income groups against the worst vagaries of the crisis as well as resurrecting the financial system and getting the society up and running again. The policies already defined in the governmental manifesto, which was a contract between the two governing parties, referred to some issues of prime relevance for issues of social inclusion, in addition to the major program for combating the huge deficit in governmental finances in cooperation with the IMF.

The government also pledged itself to change course from the pre-crisis emphasis on unrestrained financial capitalism to a more marked emphasis on equality and social justice, sustainability, feminist goals, reaffirming good morality and democracy. This was referred to in the context of a general societal goal of reaffirming a Nordic Welfare Society in Iceland. Top priority of course was the resurrection of public finances after the collapse, which led to a massive deficit of about 14% of GDP. This was done in accordance with a joint program with the IMF aiming to balance the budget by 2013.

The policy issues of major relevance for our task were the following.

Sheltering the lower income households against the reduced level of living, by redirecting welfare expenditures and making them more effective

Changing the tax burden, lowering the burden og lower groups while increasing the burden of the higher income groups.

Relieving the debt burden of households as far as public finances allow (freezing of repayments; resceduling; strategically cutting debt levels relating to modest homes for families unable to service their debts; increasing debt relief by use of tax rebates on mortgage interest costs).

Securing the housing position of the general public, thus avoiding foreclosures.

Strengthening activation of the unemployed, which reached an unprecedented level in Iceland (even though remaining below the EU average for most of the crisis).

Providing foundations for increased job creation, including by use of the occupational pension funds, which had capital amounting to about 125% of GDP after the collapse which resulted in a loss of some 20% of its assets.

Specifically the government stated that all changes in the area of social security and health would be directed by the goals of equality, accessibility, quality, security and efficiency. The aim was also to extensively cooperate and consult with stakeholders in central government, municipalities, the social partners of the labour market and independent interest groups.

Previous goals of moving some welfare services from central government to local governments were reiterrated. Strengthening of the health care centers as the first stop in the health care system (Iceland has been one of the few Western countries with rather unlimited access to specialist doctors in the public health care service). Strengthening the health care centers was thus connected with the goal of increasing surveillance and restricting the use of the more expensive specialist services.

Also were reiterrated the goals of providing facilities for elderly people to stay as long as possible in their own homes into higher ages, by improving home services and home help. Similarly the goal of building more nursing homes in the country was stated and in fact that became an important feature of economic stimulus activities. These could be financed with occupational pension fund capital and throughout the crisis they have provided important jobs for the very hardly hit construction industry.

The already started work on simplifying and restructuring the social security pension system was also to continue to a close. Similarly various goals of increasing rehabilitation and activation of previously excluded pensioners and sick persons dropping out from the labour market were to be continued.

New more varied options in family housing were also to be promoted, such as relating to options of rented housing, some of which are prominent in the other Nordic countries.

The government also placed a great emhhasis on maintaining the educational system.

On issues of employment the government stated the aim of greatly strengthening activation and educational measures, as well as for increasing availability of jobs. This was also related to the goal of formulating a comprehensive employment policy for Iceland in cooperation with the labour market partners and the academic community.

In addition the government announced a short-term program of job creation and a number of other employment-promoting initiatives:

Facility to hire individuals from the unemployment registry with partial temporary support from the unemployment benefits fund (part-benefit with work)

Strengthening innovation and start-ups Emphasis on labour-intensive operations with allocations of public funds to job creation Tax benefits (rebates) for investment in innovation and for R&D Government purchases aim at supporting national productions and jobs Government emphasizes maintenance work on public buildings, with the aim og creating

or maintaining more jobs Public services jobs maintained, especially in welfare services and education Increased cooperation with local governments, interest groups and the Labour

Directorate for creating summer jobs for young people, including green jobs and tourism-releted jobs

Facilitate provision of study loans to individuals coming to study from the labour market or from the unemployment registry

Place a particularly great emphasis on combatting long-term unemployment

The government pledged itself also to formulate a stratagic national developmental plan, which then emerged as the „Iceland 2020“ plan by the end of 2010, after extensive consultations with stakeholders in all regions of the country.

1.1.2 Integrated implementation

Given that the general character of policy implementation in Iceland is target-focused, often done in a piecemeal fashion and with a trial-error developmental procedure, one should not expect to find much systematic concern with integration across diverse policy fields. The outcome may however well be an integrated implementation, due to the extensive consultations and cooperative policy tradition. The small-society context also helps to achieve that outcome in general.

As a part of the crisis containment program the government aimed at reducing the number of ministries (from 12 to 9, which is already achieved by this year) as well as to reduce the number of public institutions, with the aim og reducing public expenditures and achieve greater efficiency at the same time. Larger and fewer institutions, larger and fewer ministries were the order of the day. This was done to some extent, while not all the proposed mergers were effected.

One important feature of this merger-and-greater-efficiency development was the creation of the Ministry of Welfare on the 1st of January 2011. Thereby the Ministry of Social Affairs and the Ministry of Health were merged. An important argument for that, in addition to the economizing and synergy achieving arguments, was the improved condition for coordinating policy implementations on welfare and work issues.

At the same time there was talk about also merging the Social Security Administration and the Directorate of Labour to further the same goal. This was talked about also with reference to the Norwegian system, were similar institutions were merged into the new NAV institution during the last decade. This plan did not materialize however, partly it seems due to opposition from the labour unions, which have made their own claim to operate the labour market institutions related to unemployment. Hence they were in favour of merging the Directorate of Labour with the Institute of Occupational Health into one labour market institute. That plan is a part of a general ambition that the labour market partners have of privatizing this part of the public welfare system into their own costody. That has however met with opposition and hence nothing further has happened on that front to date.

On the whole the implementation of policies on adequate incomes, inclusive labour market and quality services have thus since 2011 been coordinated within the Ministry of Welfare, usually in close consultation with major stakeholders. The Ministry of Finance then also comes to play when issues of expenditures arise. Due to the very difficult state of public finances and the tough program for balancing the budget this has continually meant that big compromises hava had to be made. As we show below the government generally tried to shelter welfare expenditures from cuts or rather to cut less in that area than in other areas.

Primary emphasis was on cutting administrative expenditures, higher pay in the public sector was lowered and in general the welfare expenditures were redirected so as to prioritize the middle and lower income groups. Transfers to households were prioritized and more cuts were implemented on expenditures for services (Ólafsson and Kristjánsson 2012; Ólafsson, Kristjánsson and Stefánsson 2012).

1.1.3 Vertical policy coordination

There is generally a close coordination between different regional levels in the Icelandic public administration. Due to the small size of the population in Iceland the role of government is significantly larger in provision of welfare services than prevails in the other Nordic societies. There the municipalities or regional organizations have a prime role, such as in operating the health care system and hospitals.

In the last decade the operation of the primary schools was transferred from the state to the local municipalities. Transfer of further service provisions from central government to local governments is still a policy priority and that has continued during the crisis period since 2008. Hence transfer of home nursing has moved to local authorities and from the first of January 2011 the operation of services for disabled individuals was transferred from central government to local governments.

The general policy prevails that the local authorities should provide larger parts of services to households, i.e. the services which are of particular relevance for the micro context where proximity of provider to service recipient is of major importance. The operation of the last stop in the society’s social protection system, the social assistance provision, has of course for a long time been in care of local authorities. They have independence in deciding on provisions and service levels within the framework of general legislation on welfare rights.

The central government does however issue at the beginning of each year recommendations to local authorities for what is considered an adequate amount provided in the means-tested financial assistance. This has prevailed for about 5-6 years to date. Previously there was a tendency for the social assistance benefit to lag behind other benefits in the public social security system, such as the disability benefit and O-A pensions (Herbertsson 2005). While the local authorities can deviate from the recommendations most comply to them.

1.1.4 Active participation of relevant actors

We have argued that there are particularly good conditions for exerting individuals’ voices in Icelandic society for the improvement of social inclusion conditions and poverty reductions, through the interest group and NGOs channels, and through unions and political parties. The small scale of Icelandic society, the openness and informality of social relations and generally good conditions (in media and personal relationships) for individuals’ and interest groups’ voices to be heard provide for that. This is particularly effective when matters are of common concern and touch issues of equity and fairness, as well as compassions. This means that governments of differing partisanships (both to the right or left) give in to such pressures, even though the left have had a greater propensity to give in to demands from the lower income groups and unions. This makes for a pragmatic and equitable social inclusion environment, which increases the likelihood of problems of hardship being tackled by various coalition governments. We believe that this is one of a few factors that explain the generally good outcome of Iceland in the area of social inclusion and poverty reduction. Thus the Icelandic society is quite amenable to a high degree of social capital that provides a fertile ground for pragmatic and positive solutions to immediate issues of concern to the public.

True to this tradition the present government has extensively consulted and coordinated with the labour market partners, local authorities and special interest groups. Hardly any major decision in the area of inclusion and welfare is taken without such consultations. In fact in the governmental manifesto from May 2009 there was already a reference to a major Stability Pact between government and the labour market partners, which was then finalized in the latter part of June. So in effect the government was already consulting with the social partners during the negotiations between the governmental parties.

The Stability Pact (Stöðugleikasáttmálinn) involved all the major federations of the labour market, employers’ federations, the federation of employees in the financial sector, and the federation of local municipalities. In effect all the most influential standing organizations of the society, except

for pensioners organizations (disability pensioners and old-age pensioners). The pact had the major aim of facilitating the imminent and pressing resurrection job of government and it involved a continuation of the bargaining contract from 2008 through to November 2010 without any general pay rises (minimum pay was however increased a little). It was stated in the pact that the task of balancing the budget should involve a mixed approach of expenditure cuts and tax increases. Cuts should amount to 55% of the deficit reduction and tax rises about 45%. It was up to the government of course to work out the specifics and how the burdens were to be distributed.

Instead of pay rises there was a long list of goals to be reached during the pact period, some of them of financial and macro-economic nature, and in fact some of these were beyond the governing role or influence of the partners to the pact, such as goals about interbank interest rates (solely the responsibility of the independent Central Bank), currency controls and value of the currency, and investment goals. In hindsight the pact had an importance for regaining stability in the society, since major influential organizations joined hands with the government to aid the resurrection task. However the substantive aspects were in many cases trivial and not very consequential and in fact the following year the partners, particularly the employers’ federation and the private sector unions’ federation (ASÍ) blaimed the government for not honoring some of its promises. That was however contested by government.

Prominent goals relating to households were concerned with debt relief measures and activation and job creation goals.

2. Description and Assessment of Impact and Cost Effectiveness

2.1.1 Adequate income support

Given the above mentioned policy goal of sheltering the lower and middle-income groups with the effects of the crisis on living standards it is useful to survey the major changes that were implemented to achieve that goal.

For reference the price index rose by 41% from 2007 through 2010

Minimum pensions (i.e the minimum pension guarantee) in the social security system were raised by 40.8% in the same period

Social assistance benefits were raised by 32.4%

Minimum wages were raised by 31.7%

Unemployment benefits were raised by 30.9%

The general wage index increased only by 17.8% in the same period

Subsidies for mortgage interest costs were increased by 108% while the interest cost of the same loans increased by 40.6%

On this list are many benefits that specifically accru to the lowest income groups and some also go in significant amounts to middle income groups (suh as interest cost subsidies). In addition the personal tax allowance in the income taxation system was increased by some 45% in the same period. That significantly reduced the tax burden of lower income groups (Ólafsson and Kristjánsson 2012).

All of these changes relating to adequate income support while the worst of the crisis unfolded (bottom was reached by mid year 2010) had a significant effect on sheltering the lower and middle-income groups against reduced living standards. Hence the real disposable incomes declined less in those groups than it did in the higher income groups, as can be clearly seen in figure 4.

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The cut in living standard of the lowest two deciles was about 9%, the median groups got a cut of 14% and the second highest decile had a cut of 17% while the top decile lost about 38%. This outcome was both due to the redistribution effect of government policy and reduced financial earnings that had the greatest effect in the top income group.

As we have shown in former reports the relative poverty rate did not increase in Iceland during the crisis. In fact the overall 60% at risk of poverty rate for the population went from just over 10% to 9.2% in 2010. If we specifically look at the old age pensioners their poverty rate went from about 18% in 2006-7 down to 4.5% in 2010. That was primarily a result of decisive increase of the minimum pension in the social security system as well as the lowering of tax burden in the lowest income groups. At the same time the poverty risk of immigrants rose as was shown in figure 3.

In figure 5 we see that a group that generally is at a significant risk of poverty, the lowest educated individuals in the society, were not incurred for higher relative poverty rates during the crisis. Given the enormity of the financial collapse that seems to be a significant achievement in averting increased poverty at the depth of the crisis. Financial hardships were however increased for all (given the 9% reduction in real earnings of the lowest groups) and therefore one should interpret the figures on relative poverty rates with due caution. Absolute poverty measures would be more realistic in a situation such as the present financial crisis. The relative measures do however indicate that the lowest groups were sheltered to a higher degree and hence the income distribution did become more equal during the crisis (Ólafsson and Kristjánsson 2012a and Ólafsson and Kristjánsson 2012; also Statistics Iceland 2011 and 2012).

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Figure 5: People with low education level at risk of poverty (60%), 2005-2010. Iceland, Ireland, Norway and the EU average.

Figure 5 also shows that Iceland did particularly well in sheltering this highly vulnerable group, basically maintaining its favourable position on that account during the crisis, in comparison to the EU average and Ireland and Norway, to mention two neighboring countries (one in a similar crisis as Iceland, i.e. Ireland, and Norway which was hardly affected by the crisis at all).

In the appendix we also show poverty rates for selected groups before and after social benefits and transfers, indicating that the social protection system raised about 16% of the population above the 60% poverty level in 2006. That figure was up to 25% in 2010, clearly showing that the strategic application of the social protection system averted a significant increase in the relative poverty level during the dark days of the crisis.

2.1.2 Inclusive labour market

On the whole there has been an increase in public expenditures on labour market activation and inclusion measures by about 60% from 2008 through 2011. Prior to the crisis Iceland did not have a large array of measures to activate individuals, since the participation rate was generally very high and unemployment level were generally low and primarily short-term. After the crisis this was widely seen as a field for a major increase in efforts and this was indeed done. The following are some of the main public measures put in place from 2009 onwards, both in the form of special strategic efforts (Átaksverkefni) and more varied ongoing measures on offer by the Directorate for Labour and the Public Employment services.

Special strategic programs (see further on www.vinnumalastofnun.is): Ungt fólk til athafna (Youth to Action). This program is aimed at young people at ages

16-29. The program promises to offer any individual at those ages that becomes registered as unemployed either a job, educational opportunity, training for specific skills or any other accepted measure on offer by the Directorate within a period of three months. This started in February 2010 and is still running. In relation to this access to various educational options were extended, both in the labour market program for life-long learning (Starfsmenntastöðvar atvinnulífsins) and in the formal public educational system. All registered unemployed in those age groups were to be covered (or reached with offers) by 1st September 2010. We assess the success of that program in section 4.

ÞOR – Þekking og reynsla (Dare – Knowledge and experience). This is a program that is aimed at long-term unemployed individuals, defining long-term unemployment as 3 months or more. It was started on August 1st 2010 and participation was made compulsory for all concernd registered unemployed individuals. When the call comes the respective individual has to go and see an advisor at the Directorate and register for some of the about 70 specific measures on offer (ranging from jobs to education or skill training). Failure to comply can lead to ceisure of benefits payment. This is also tied to continuing efforts to seek jobs.

Nám er vinnandi vegur (Education is a Working Option). This is a special effort to channel registered individuals into education, started in the autumn of 2011 and continued in 2012. Specific educational offers were made available. Individuals transferring from the unemployment registry to education can continue receiving unemployment benefit to the end of the respective year. Then they qualify for study loans (from the public students study loan fund – LIN). Those who do not qualify are eligible for a study grant from the unemployment benefits fund. The study options ranged from access to university to formal study in the secondary educational system as well as in shorter-term courses.

Routine labour market activation measures (see further on www.vinnumalastofnun.is) Educational opportunities of various kinds Charity work, in connection with formal charity organizations (such as the Red Cross, the

Church etc.) Employment-related rehabilitation Start-up initiatives, for example in cooperation with incubation centres Special support for entrepreneurial activities Specific skills training programs Subsidized employment – retainment of unemployment benefit plus pension insurance

contribution while employed and paid by union contracts.

All of these measures are formal and usually involve contracts and monitoring of progress.

As figure 6 shows the registered unemployment rate for Icelanders and immigrants did not just reach differeing heights but the recovery is also divergent.

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Figure 6: Registered unemployment 2000-2011: Icelanders and immigrants compared.Directorate of Labour, direct contact (Karl Sigurðsson).

While the registered unemployed Icelandic nationals reached a top of 8.1% in 2009 the immigrant population in general topped at 14.5% in 2010 and Polish immigrants specifically topped at just over 20% also in 2010. The reason for higher unemployment rate amongst Polish immigrants is probably due to the fact that they have been very prominent as workers in the construction industry, which was particularly badly hit.

But another important message from figure 6 is the fact that progress towards lower registered unemployment seems to be the sole prerogative of Icelandic nationals, at least to the end of year 2011. This is in line with the higher rate for risk of poverty or social exclusion amongst foreigners in Iceland, shown on figure 3 above. This clearly raises the question of whether the measures implemented for reducing unemployment are sufficiently reaching the immigrant population. The pattern of unemployment before the crisis does not indicate a direct discrimination at that time, since the Polish immigrants had the lowest unemployment rate from 2000 through 2007. If the higher unemployment rate amongst them during the crisis is due to construction industry effect then the indication is that labour market measures are not reaching them sufficiently. Education options may also be a special hindrance for them. Hence this issue seems in need of great consideration in order to avoid the creation of a longer-term problem and a divide between Icelandic nationals and the immigrant population. Given the situation as it is now this should be a priority policy goal.

2.1.3 Access to quality services

Even though the government pledged to preserve welfare services in its manifesto this proved to be a difficult feat to optain, given the poor state of public finances and the toughness of the task for balancing the budget. Even though welfare expenditures got less cuts overall than other categories of public expenditures there were quite drastic cuts in some areas of welfare services. Figure 7 shows how the welfare expenditures faired when disaggregated for overall expenditures on transfers and services. On the whole social protection expenditures increased (in fixed prices) from 2007 to 2010 by 4.2%. Transfers increased much more, or by 11.6% while services expenditures declined by 2.8%.

Services total

Transfers total

Social Protection expenditures total

-5.0 0.0 5.0 10.0 15.0

-2.8

11.6

4.2

Chart Title

Series1

Figure 7: Development of social protection expenditures from 2007 through 2010 (% change): Services and transfers.Statistics Iceland

This reflects the governmental priorities which were concentrated on softening the reduction of real earnings of lower and middle income households. Administration and services got the largest cuts (see further a figure on public expenditures in Appendix).

While hospital services received quite extensive expenditure cuts it is interesting that indicators of service quality and waiting lists did not seem to be affected until 2010. In fact waiting lists for many important operations in the hospital services were in fact shortened from 2007 to 2010, but since 2010 they have increased somewhat again. Thus by 2012 there is considerable strain being felt in the health care and hospital services, both as regards manning and maintenance and renewal of medical equipment. The budget for 2013 is promising some increases for purchase of specialized equipment and while the public sector is in general burdened with a further 0.5% rationalization order for 2013 the health care sector is relieved of that request.

So on the whole one can say that access to health care services has been fully maintained but the quality of services may have had some setback due to more restricted manning levels and decline of equipment qualities (OECD 2011; Diretorate of Health 2012).

In education expenditure cuts were also extensive, despite the government’s manifesto claim about its importance and the intention of sheltering children. The educational system got expenditure cuts disproportionally at lower levels (primary and secondary levels) while the university level got a slight increase. The reason for the latter is the fact that the number of students at university level increased largely, providing some increases in student-tied expenditures. Yet expenditures per student fell quite a lot.

Since many of the labour market measures involved facilitating entry to university level education as well as to secondary level institutions, without correspondingly increased funding there is likely to have been an increased strain on quality of educational services. The increasing number of students however indirectly sheltered the university institutions from sacking full time pesonel. Part-time teaching was however significanty reduced and the average number of students in courses increased. It remains to be seen if this development has compromised quality standards. As regards the University of Iceland it managed to enter the rank of the 300 best universities in the world (according to the Times Higher Educational Supplement) in 2011. In 2012 it managed to improve its position a little. The ranking of educational services is still að drawback for the university so the strength comes more from research than from quality of teaching services.

Manning of social services increased significantly during the crisis years so one should perhaps not expect a significant decline in that area, despite increasing need for such services (Ólafsson, Kristjánsson and Stefánsson 2012).

3. Financial Resources

3.1.1 National resources

While public revenues had been larger than expenditures between 2004 and 2007, i.e. during the height of the bubble economy, the picture changed completely after the onset of the crisis. Public expenditures rose drastically already in 2008 (with large one-time expenditures, such as related to the collapse of the financial system and resurrection of the Central Bank and other banks as well). Much of this extra crisis cost was turned into public debt. As figure 8 shows the real value of expenditures per capital was lowered consecutively from 2009 through 2011 and further on through 2012. The budget for 2013 is going to be quite close to balanced and fully balanced by 2014.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

500000

1000000

1500000

2000000

2500000

3000000

3500000

Revenue per capita at 2011 prices, ISK Expenditure per capita at 2011 prices, ISK

IKr.

Figure 8: Public expenditures and revenues per capita in fixes 2011 prices, 2001 to 2011.Statistics Iceland

So on the whole we can say that despite the setback the real expenditure level per capita is not far from what prevailed in 2003-2004, which were no crisis years. That however underestimates the extra strain on public finances since close to 20% of the public expenditures now are on interest cost, an item that prior to the crisis was very small indeed.

Figure 9 shows a breakdown of real changes in welfare expenditures from 2007 to 2010, disaggregated by major social protection areas.

8.2 Services

8. Other social assistance

7.1.1 Rental subsidies

7. Housing

5.1.4.3 Allemony

5.1.1 Birth leave benefits

5. Families and children

3.1.1.2 Occupational pension funds

3.1 Transfers

2.2 Services

2.1.1.1 Social security

2. Disability

1.1 Transfers

Transfers total

-30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

-4.645.2

16.560.4

26.958.758.7

3.125.0

1.2-11.0

-3.9-0.3

1.38.7

-20.2-3.7-3.3

-1.128.6

14.018.2

13.4-9.7

-19.6-11.4

-2.811.6

4.2

Change from 2007 to 2010 in %

Figure 9: Changes in welfare expenditures from 2007 to 2010, by major types and by transfers and services. Change in fixed 2010 prices.Statistics Iceland

Here we see how cuts in the area of sickness were quite extensive, both as regards transfers and services. Most of the transfers in this area (sickness benefits) come from employers (retainment of pay for 1 to 3 months in cases of serious sickness) and these were not significantly affected so the figures only refer to public expenditure changes. In the field of disability pensions and services there was a decisive increase on all fronts. Partly this reflects the large increase in the minimum pension but some rehabilitation measures aimed at the unemployed may be counted here.

For old age pensioners there were cuts in the public social security system. Even though the lowest income groups of O-A pensioners were sheltered by the minimum pension guarantee those with higher earnings got significanty increased cuts, since the basic pension of the social security became income-tested against occupational pension fund earnings for the first time in July 2009. Expenditures from the occupational pension funds however increased, since their pensions are tied to the price index and inflation increased significantly in 2008-2010.

In the field of family and child benefits expenditures there were rather large cuts in birth leaves benefits while the child benefits increased a little bit. The child benefit also became more targeted at the very lowest income earning households. The government has now annunced in the budget for the year 2013 that it will increase the child benefit by about 30%, which is a large step and timely in the sense of better protecting a particularly vulnerable group, a group that also in many cases sank deep in depth problems.

Then in the field of housing benefits there were very large increases in subsidies of mortgage interest costs, by some 60% for owners and increased subsidies to families in rented housing increased by 27%. Increases in social assistance were also quite large, in the region of 45%.

Lastly the expenditures on unemployment benefits increased by some 620%, with the unemployment rate going from about 1-2% up to around 8%. Expenditures on services to the unemployed, or various activation measures, increased by about 60%.

The areas of the largest increases in expenditures, unemployment and housing, can be further examined in figure 10, which shows the development in real IKr. (in 2010 prices) from 2007 through 2010.

Housing interest cost subsidies

Rental subsidies

Housing transfers total

Services to the unemployed

Unemployment benefits/transfers

Total unemployment expenditures

0 10 20 30 40 50 60 70 80 90

36.9

8.5

51.1

3.2

76.3

79.6

34.1

8.4

47.6

1.8

81.7

83.5

25.2

5.5

35.9

2.2

17.2

19.4

23

6.7

32.2

2

10.6

12.6

2007 2008 2009 2010

Public expenditures per capita, in IKr. at fixed 2010 prices

Figure 10: Public expenditures on unemployment and housing, from 2007 to 2010 (IKr. per capita at fixed prices).Statistics Iceland

Housing expenditures (primarily subsidies for mortgages interest costs) were significantly larger than unemployment-related expenditures before the crisis. The increases in the unemployment expenditures were of course much greater but a 60% increases in the mortgage interest subsidies on top of a large sum were quite large in the context.

So on the whole the welfare or social protection expenditures were redirected in a strategic manner which emphasized transfer payment increases in some important areas while cuts were larger on service provisions. The transfer expenditures were also in many cases directed or targeted further at lower and middle income households, hence contributing to redistributive effects on real disposable earnings, favouring those same households.

3.1.2 Use of EU structural funds

Since Iceland is not a member of EU it has not to any significant extent enjoyed contributions from EU structural funds for financing policy measures in the area of welfare.

4. Monitoring and Evaluation

On the whole we would argue that there is a lack of evaluation studies of how the various policy measures have succeeded in reaching their goals in Iceland. While general data on poverty, unemployment, earnings and on various consequences of the crisis on levels of living clearly indicate that Iceland has succeeded reasonably in weathering a massive crisis after the collapse of the country’s financial system in the autumn of 2008, we still know less about the effectiveness of individual measures (Ólafsson and Kristjánsson 2012, Ólafsson, Kristjánsson and Stefánsson 2012; Central Bank 2012).

Still there have been some significant new efforts at improving monitoring of crisis development and consequences and evaluations of specific measures. In general we would mention the following:

Data provided by involved institutions, such as the Directorate of Labour; Social Security Administration; Tax authorities; Ministries and interest groups

Data provided by Statistics Iceland and academic researchers

Monitoring activities of the Welfare Watch (set up in 2009)

The Iceland 2020 program and its monitoring of identified strategic targets

Special evaluation studies

In general there is considerable transparency in Icelandic society and, as we have argued in a former report, considerable responsiveness of governments to concerns and voices from the grassroot. This sometimes has the effect of drawing out information and statistics from concerned institutions. An example of that is the data in table 1 which was provided to us by the Directorate of Labour that administers the unemployment benefits fund and many of the ALMP measures. The data refer to participation of unemployed individuals in the Directorate’s measures during the year 2011 and success in cutting numbers of individuals on the unemployment registers.

Given that on average about 13.000 individuals (some 8% of the labour force) were registered as unemployed in every month of 2011 and given the flow in and out of the registry in every year it seems that the nearly 15.400 individuals that took part in the ALMP measures during the year must be close to everybody that has been unemployed for more than three months in that year (see table 1). In that sense the coverage of interventions and measures must be quite high by international standards in proportional terms.

The table shows the numbers of participants in individual measures or programs during the year and the position of the individuals after the respective program was finished (i.e. number and proportions still unemployed or having exited from the unemployment registry).

The biggest participation is in various educational measures, with some 55% of the unemployed registering in those, the second largest group (about a third) only takes basic measures primarily aimed at facilitating job search and some 8% take measures which involve leaving the unemployment registry and taking up training or a job supported by transferring the unemployment benefit to the employer concerned.

This last group, i.e. those that enter work places, have the highest success rate, ranging from 54% to 82% leaving the unemployment registry within three months of the program ending. So this seems in majority of cases lead to a more permanent jobs. Those who enter vocational training or rehabilitation while still on unemployment benefit (some 2-3% of the unemployed) have quite good results, ranging from 31% to 53% leaving the unemployment registry within three months of termination of the program.

Table 1: Participation in Active Labour Market Programs and their Outcomes in 2011

Source: Directorate of Labour, direct contact; data provided by Karl Sigurðsson

Those who go in for educational measures, the largest group, have also reasonable success rates, ranging from 23% to 87% leaving the registry. Though the group only taking part in basic measures has lower success rates on average the difference between that group and the general educational measures group is not significant. The success rates for the basic group range from 24% to 31%.

So on average about a third of all the registered unemployed individuals have left the unemployment registry within three months of finishing some of the measures on offer by the Directorate of Labour during 2011.

Of other evaluation and monitoring activities various statistics and reports from Statistics Iceland are of importance, especially statistics from the EU-SILC surveys that relate closely to some of the social inclusion and poverty issues. The participation of Statistics Iceland in Eurostat program since 2004 has thus been a very important step in imporving information access in this area. Various other SI publications of routine data are also of use for monitoring these issues.

The Welfare Watch (Velferðarvaktin) which was set up in 2009 has continually monitored welfare and social problem developments during the crisis years and voiced concerns and given recommendations to stakeholders, institutions and government, with the aim og facilitating early responses to imminent or emerging problems related to the crisis. The Welfare Watch has had a special focus on issues relating to children (see our more extended survey of the activities of the Welfare Watch in the first Social Inclusion Network Report for 2012 – Iceland’s Way out of the Crisis).

One important innovation that the Welfare Watch initiated was the compilation of a compendium of social indicators with a special focus on short-term changes (mont-to-month; quarter-to-quarter). These are planned to be updated regularly and hopefully facilitate swift reactions to imminent problems. This was done in cooperation with a wide array of concerned public insitutions and the academic community, as well as Statistics Iceland.

The strategic program Iceland 2020, which involved a wide-ranging consultation and cooperation with stakehoders from all over Iceland in 2009-2010 defined some 20 measurable goals which are monitored regularly as data becomes available on the web site of ther Prime Minister’s Office

(http://www.forsaetisraduneyti.is/2020/maelikvardar). Amongst these are important social inclusion measures such as relating to unemployment, disability pensioners, equality, drop-out rates from secondary schools.

In April of 2012 the Prime Minister’s Office also published a monitoring report about the progress of the various issues aimed at in the Iceland 2020 program, i.e. other issues that the directly measurable ones (http://www.forsaetisraduneyti.is/frettir/nr/7150). This report surveys the progress on an all fronts relating to different ministries and institutions.

Specific evaluation surveys are rather few and far between and improvement on the evaluation front should perhaps be focused on producing more of those, undertaken by independent institutions or researchers. The Social Sciences Research Institute of the University of Iceland undertook an evaluation of the size and characteristics of the group of people seeking food donations from emergency help organizations (http://www.velferdarraduneyti.is/rit-og-skyrslur-vel/nr/32519) towards the end of year 2010, when the risis was at its deepest level. The receivers of food donations were primarily at ages 20-59, most of them unemployed or disability pensioners. Immigrants were also quite prominent in these groups, particularly Polish immigrants. This is thus another indicator of high risk position of immigrant in Iceland, in addition to their high unemployment rates.

The Social Research Centre of the University iof Iceland undertook two surveys on the impact of the crisis on the level of living of the population, for the Ministry of Welfare in 2011-2012. The reports were published in 2012 (Ólafsson and Kristjánsson 2012; Ólafsson, Kristjánsson and Stefánsson 2012). These reports surveyed various aspects of level of living consequences, such as earnings developments, debt burdens, welfare provisions developments, unemployment and jobs developments, emigration, poverty and financial hardships and attitudes of the general population to their conditions and prospects.

The main conclusions of the reports were that the countervailing policy measures of government were to a significant extent successful in softening the crisis effects on the population and also in facilitating the resurrection of the economy. The main drawbacks were found to be low child benefits and deteriorating position of old-age pensioners with average or higher pensions, who received disproportionate cuts, while the lowest earning pensioners were well sheltered. Slow growth of new jobs was also a drawback, which is primarily caused by high debt levels of firms and businesses as well as government and households. Hence conditions for new investments are difficult, as is common in the wake of deep financial crises (Jonung 2000; Kiander 2005a and 2005b).

The Central Bank of Iceland produced a very interesting study of debt burden and debt relief measures from the beginning of the crisis to the end of 2010 (Ólafsson and Vignisdóttir 2012; see also IMF 2012). It surveyed the major development of debt accumulation of households and found that the main part of the debt problem was already in place before the collapse of the banks and about 85% of serious debt burden problems of households were also in place before the collapse (i.e. by the summer of 2008). The debt problems culminated in the autumn of 2009 and have improved significantly since then.

5. Recommendations

5.1.1 Priority actions for the comprehensive active inclusion starategy

Directly addressing synchronization of the various social inclusion measures would be a useful exercise for Icelandic authorities. This might lead to improved efficiency in utilization of resources in the field.

5.1.2 Priorities for each of the three strands

Adequate income support: a) I would recommend that the child benefit be increased by up to 50%. The main reason for that is its long-term erosion from 1995 tol 2005 and inadequate use of that measure to combat negative consequences of the crisis on families with children. Young families with children were often also involved in purchasing flats during the period from 2004 to 2008, at the height of the bubble economy. Housing prices at that time were highly elevated and hence the debt accumulation of these families became unusually large. A significant increase in the child benefit would help these families disproportionally, given the income-asset-and-family testing of the benefit formula.b) I would recommend reducing the income-testing of the basic social security benefit against occupational pension earnings which was implemented in July 2009 (or increase the free income bracket of the social security benefit), to improve the position of elderly pensioners who have means above the poverty rate and towards the median earnings of this group.

Inclusive labour market:I would recommend that better inclusion of unemployed immigrant workers should be outlined as a special priority program. This group has much higher unemployment rates than the Icelandic nationals and lacks a social support system in an extended family network, which commonly plays an important role for Icelanders in dire need. This should specifically concentrate on Polish workers who have almost threefold the unemployment rate of Icelandic nationals.

Access to quality services:a) I would recommend an increased effort to ease access of foreign immigrants to labour market and educational institutions, which should facilitate their improved use of ALMP programs and further assimilate them to the society.b) Increasing manning levels in health care and education should be prioritized as soon as public finances allow.

5.1.3 Priorities for the EU level

Without wanting to be too self-centered or arrogant I think that some EU countries might find some useful lessons from the Icelandic approach to tackling the crisis, such as the approach of redistributing welfare exenditures and redistributing the burdens in favour of the lower and middle-income groups. This seems to have reduced need for contractionary austerity measures and helped in containing the unemployment problem.

Appendix II: Extra data

2003 2004 2005 2006 2007 2008 2009 20100

10

20

30

40

50

60

70

80

18.6 18.7 17.4 16.1 16.8 17.2

23.225.4

Total 0-17 18-24 65+

Diff

eren

ce in

pov

erty

rat

es b

efor

e an

d af

ter

soci

al

tran

sfer

s (%

-poi

nts)

Figure A.1: Poverty rates before and after social transfers (%-points). Total population and different age groups.Statistics Iceland (2012).

Gener

al Pub

lic se

rvice

Defenc

e

Public

orde

r and

safet

y

Econo

mic aff

airs

Enviro

mental

prote

ction

Hou

sing a

nd co

mmunity

amen

ities

Health

Recre

ation

, cult

ure a

nd re

ligion

Educa

tion

Social

prote

ction

0

50000

100000

150000

200000

250000

300000

350000

2007200820092010

Figure A2: Development of public expenditures from 2007 through 2010. Icelandic kronur at fixed 2010 prices.

Table A1: Expenditure profile for disability and sickness: Iceland and OECD countries compared.

Appendix II – An Overview of Debt Relief Measures for Households

Source: Central Bank of Iceland (Þorvarður Tjörvi Ólafsson and Karen Áslaug Vignisdóttir 2012)

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