OVERVIEW OF FISCAL DECENTRALISATION
The government organisation in Iceland is based on a two-tier structure: the central government and 76 municipalities (sub-national government).
Legal acts governing fiscal decentralisation
Art.78 of the Constitution of Iceland grants the legal authority of self-government to local authorities. Art.2 of the Act on Local Authorities reiterates the principle of self-government and provides the legislative framework.
Qualifying fiscal decentralisation
In 2013, sub-national governments’ expenditures in Iceland accounted for 30% of total government expenditures.
Local authorities in Iceland are assigned a wide array of tasks; they need to perform the activities specifically delegated to them by the Law (most notably education, urban planning and social welfare) but also have the flexibility to perform different duties in the interests of their communities.
According to the most recently available (2006) figures, local authorities’ revenues are based on the proceeds of the municipal income tax (63%), on charges and fees (18%), on property taxes (11%) and on the income from the Municipality Equalisation Fund (8%). Local authorities have some autonomy over the determination of the marginal rates of the municipal income tax and property taxes.
Source: authors’ elaboration on OECD data. For further details, see methodology.
Fiscal equalisation mechanism
The Municipality Equalisation Fund was established in 1937 and reformed in 1990 and in 1996 to adapt its functioning to the evolution of local authorities’ competencies. The fund has a two functions: first, it transfers resources among local authorities to ensure that they all have the necessary resources to perform their basic duties; second, the fund pays a share of rent compensation to all local authorities and statutory contributions to institutions and associations of local authorities.
LEVEL OF FISCAL DECENTRALISATION
Revenue autonomy (own revenues relative to total resources available) at the local level is very high (89%), which entails a rate of dependency on central government transfers that is much lower than the EU average (11% versus 47%). Local own revenues represent 27% of total government revenues, which is higher than the EU average (13%).
Source: authors’ elaboration on OECD data. For further details, see methodology.
The composite ratio, which captures aspects of fiscal decentralisation of both revenue and expenditure, suggests that the sub-national governments in Iceland have a degree of fiscal decentralisation (39%) that is higher than the EU average (18%).
Deficit and debt at sub-national levels
In 2012, the consolidated gross debt of the local government sector amounted to 8.3% of GDP, this value has been profoundly influenced by the strong effects of the financial crisis on local public budgets. Between 2007 and 2009 alone, local government debt increased from 4.9% to 9.5% of GDP.
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
EXPENDITURE BY GOVERNMENT LEVEL AND BY POLICY AREA
Expenditures of local authorities represent a significant part of total general government expenditures in the fields of recreation culture and religion (65%), education (59%), environmental protection (45%), housing and community amenities (31%) and social protection (29%).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
Local authorities’ spending is particularly concentrated, and more so than the EU average, in the fields of education (35% of the total local budget), social protection (23%) and recreation, culture and religion (15%).
Source: authors’ elaboration on EUROSTAT data. For further details, see methodology.
