Iceland s means to restrict compensation

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Muriel Barton
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1 Iceland s means to restrict compensation Ministry of Finance Agusta H. Gustafsdottir 9. December 2010

2 Context 2008: Collapse of the financial system Radical alterations of the Icelandic economy Collaboration with IMF Governmental goals in fiscal finances Central government s wage policy Centralized Decentralized Collective Bargain Stability Pact New Stability Pact? The mission ahead

3 Collapse of the Icelandic Financial Market in 2008 With the collapse of the financial market in October 2008, the foundations of the Icelandic economy were radically altered. The collapse has caused the revenue of the Treasury to shrink, expenditure to increase, and the Treasury is currently run with a record deficit. Various measures have been taken to restore Iceland s economy, in collaboration with International Monetary Fund. Today I will focus on means that have been taken to restrict compensation.

4 Governmental goals in fiscal finances Government plan for a balance in fiscal finances that charts its course in Treasury revenue procurement for the next several years and places a limit on its expenditure. In order to reach these targets, the Treasury primary balance is expected to be: -7.7 per cent of GDP in per cent of GDP in per cent of GDP in per cent of GDP in per cent of GDP in 2013

5 Government s fiscal policy: For The Government has set a goal for current expenditure of all ministries, government agencies and other activity financed by the Treasury. 10 per cent of the annual turnover of public administration agencies 7 per cent for education 5 per cent for welfare Ministries and their agencies have mostly be entrusted with the task of implementing plans.

6 Government s fiscal policy: For Expenditures not classified by Other industries Transportation and Mining, manufacturing and Agriculture, forestry, fishing, Fuel and energy Recreation, culture, and religion Housing and community Social security and welfare Health services Education Public order and safety General public services billions ISK Draft ¹ According to the COFOG standard published by the United Nations. (Classification of the Functions of Government).

7 Government s wage policy: Centralized The wages of senior managers in the central government were cut, by the Wage Council so their wages would not exceed the wage of the Prime Minister. The pay of managers of companies, institutions and limited liability companies that are majority-owned by the Treasury were placed under the jurisdiction of the Wage Council. The Government emphasizes that ministries and agencies must implement spending cuts themselves in accordance with its guidelines.

8 Government s wage policy: Centralized When reducing wage costs, jobs should be protected as much as possible, lowest wages are not to be cut, but higher pay grades bear the brunt of the cuts. Overtime pay should be reduced as much as possible. Work proportions should be reduced rather than have to let staff go. Employees who have gained the right to a pension are offered flexible separation terms.

9 Government s wage policy: Centralized Measures have been taken to reduce travel and related expenses significantly from the level of recent years. Gender equality in changing pay arrangements. Vacant posts in ministries or agencies are not refilled unless absolutely necessary. Flat expenditure cuts have been avoided.

10 Government s wage policy: Decentralized All tasks and operations of agencies have been reassessed. The aim is to reduce or abolish tasks with a low priority. Bottom up work with employees in finding ways within ministries and agencies to save and reorganize in more efficient manner. Central cost containment and task restructuring team Representatives from Ministry of Finance and dir. generals - appointed to work with representatives from all ministries and their agencies.

11 Government s wage policy: Decentralized To sum up: Reduce salaries of the highest and middle paid Reduce overtime Avoid lay-offs Cutback in travel and related expenses Cutback in vehicle expenditure

Wage Index for the private and public sector by quarter 2008-2010, change from previous quarter 7% 6% 5% 4% 3% 2% 1% 0% -1% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2008 2009 2010 Total Private Sector

12 Wage Index for the private and public sector by quarter , change from previous quarter 7% 6% 5% 4% 3% 2% 1% 0% -1% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Total Private Sector Public Sector CPI Source: Statistics Iceland Pay increase in the Public sector on third quartile in 2008 were according to agreement and reflect wage development in earlier periods of the private sector. In second quartile of 2009 labour market parties assigned (Stability Pact) regarding moderate changes in wages intended to cover the lowest income group.

13 Wage Index for the private and public sector by quarter , change from previous quarter The main difference in the implementation of the Stability Pact between markets were: All private sector employees had some minimum increase in wage, according to collective agreement of 5,5 per cent in that period. There were none incensement for wage above 310 thousand kroner (ca monthly at today's rate). Private Sector: there is a substantial difference in opportunities to increase wage, depending on sectors. Collective wage agreements expired in November. Subject matter for the Pay Negotiation Committee of the government in the coming negotiations is following: How to make it possible for the state to be a competitive employer simultaneously as new wage contract can not result in significant cost increase.

14 Mission Ahead Not easy, severe cutbacks in state finance Long term mission, next 5-10 years Demands various operations, cutting wages will not do it. Demand for sustainable operations Restructuring Doing more for less Strategic use of HRM methods New inspired way of thinking

15 Thank you for listening!

16 Thank you for listening!

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