Iceland’s 2027 budget would bring the state back into surplus after eight consecutive years of deficits, under a proposal presented by Prime Minister Kristrún Frostadóttir’s government on 7 September. The draft foresees a surplus of ISK 5 billion (€36 million), combining tighter public spending with higher revenues from banks, transport and tourism. The government argues that restoring balance could help reduce inflation and eventually interest rates, although economists have questioned whether some of the new charges could instead push prices higher.
The proposal was presented by Minister of Finance and Economic Affairs Daði Már Kristófersson ahead of the opening of the Alþingi on 8 September. The first parliamentary debate on the budget is scheduled for 10 and 11 September.
How Iceland’s 2027 budget reaches a surplus
The government plans measures worth ISK 44.2 billion (€313 million) to contain spending and improve the efficiency of the public administration. They include reducing the number of state employees, simplifying administrative structures, merging institutions and changing public procurement.
The government says the restraint will not be distributed equally across public services. Health and elderly care, schools, courts and law enforcement will face smaller reductions in order to protect essential services. At the same time, ISK 28.8 billion (€207 million) is being allocated to new priorities, including healthcare, education, roads, public transport, policing and defence.
On the revenue side, measures are expected to raise around ISK 34 billion (€245 million) in 2027. They include a higher bank tax and additional charges on tourists, alongside changes affecting transport. Icelandic outlet Heimildin reported that the package also includes a kilometre-based road charge and fees linked to tourism facilities.
According to the government, the changes follow accumulated state deficits of ISK 866 billion over recent years. The 2027 proposal would produce the first positive fiscal balance in almost a decade.
The government wants fiscal policy to help lower inflation
The budget is also intended to support Iceland’s fight against persistent inflation and high borrowing costs. The Central Bank of Iceland raised its key interest rate to 8% in August, after inflation reached 5.3% in July. The Bank expects inflation to remain elevated in the coming months before declining more rapidly during 2027.
The government argues that reducing the state’s borrowing requirement should ease pressure on the economy and eventually create better conditions for lower interest rates. Finance Minister Daði Már said balanced public finances were not an objective in themselves, but a way to reduce inflation and interest costs while protecting the state’s ability to fund public services.
That argument is particularly relevant as economic growth slows. The Central Bank currently expects Icelandic GDP to grow by 1.4% in 2026, before accelerating to 1.9% in 2027.
Economists warn that debt is still rising
The return to a small surplus does not mean Iceland’s fiscal pressures have disappeared. The government expects Treasury debt to reach around ISK 2.1 trillion at the end of 2027, just under 38% of GDP, and says its objective is for the ratio to start falling in subsequent years.
Economist Konráð S. Guðjónsson told public broadcaster RÚV that it was too early to celebrate balanced finances. He argued that the underlying borrowing position remains negative and that the state debt ratio is still increasing.
He also questioned the inflationary effects of some of the revenue measures. According to Guðjónsson, increases in the kilometre charge and other fees could add around 0.3 percentage points to the consumer price index when they take effect after the turn of the year. His assessment therefore challenges the government’s argument that the package will support disinflation in the short term.
The debate over the Iceland 2027 budget will consequently focus not only on whether the government can deliver its first surplus in eight years, but on how the adjustment is distributed between spending restraint, taxes and fees. With interest rates still at 8% and economic growth slowing, the fiscal package will also test whether Reykjavik can restore public finances without adding new pressure to prices or weakening investment.
