Iceland's economic growth is regaining strength as monetary policy eases and exports expand. Enhancing public spending and tax efficiency, reforming regulatory frameworks, improving education and boosting electricity generation will be key to sustain robust growth, according to a new OECD report.
The latest OECD Economic Survey of Iceland projects GDP growth of 2.7% in 2025 and 3.0% in 2026. Inflation is significantly driven by housing costs and, while it continues to decline, still exceeds the central bank's 2.5% target.
"The Icelandic economy has been well served by a robust policy framework, enabling exceptionally high living standards," OECD Secretary-General Mathias Cormann said, presenting the Survey in Reykjavik alongside Iceland's Minister of Finance and Economic Affairs Daði Már Kristófersson. "Continuing reform will help lay the foundations for future sustainable growth, and fiscal reforms, including expenditure rules and spending reviews, will help manage growing spending pressures."
A new expenditure rule, to be considered in parliament, could help smooth economic cycles and put public finances on firmer ground. Spending reviews, notably for education or health care, could also make a key contribution to ensuring fiscal prudence. Reducing exemptions in the value-added tax system would raise tax revenues at lower costs to the economy.
Reforming Iceland's stringent regulatory frameworks would boost business dynamism and restore slowing productivity growth. Reducing administrative and regulatory burdens for business registrations and foreign direct investment, lowering non-tariff trade barriers, and ensuring a level playing field in the market, is essential. The government should set up a system where entrepreneurs can apply for all necessary business licences in one place and review existing professional licensing requirements. The creation of a simplified insolvency regime for small and medium-sized enterprises would reduce the cost burden and speed up insolvency proceedings.
Educational performance has declined sharply among young people over the past two decades. Iceland should introduce comprehensive education reform, including the re-introduction of standardised testing, a more focused curriculum, improvements in teacher training and an expansion of Icelandic language programmes for immigrant children.
Abundant domestic electricity has helped drive Iceland's economic development, but growing demand is now straining the power system. Power shortages are becoming more frequent, and prices have risen. Accelerating and simplifying administrative procedures for priority projects could help increase power generation. Gradually expanding the wholesale market would increase the efficiency of the electricity system, and introducing demand-dependent pricing would secure an efficient green transition and maintain energy security.
