This is a single blog caption

(English) Taxing the Icelandic Fisheries Success

Unlike most other industries during the boom from 2001 – 2008 the fishing industry in Iceland actually experienced a decline in profits. The high exchange rates of the Icelandic Krona (Iceland’s currency) limited demand for Icelandic exports and made it less profitable to export goods than before.  Now, although the Icelandic fish catch has declined since 2008, the value of the catch has doubled according to Statistics Iceland. The increase in value has mainly been the result of the depreciation of the Icelandic Krona following the 2008 financial crisis.

The 2008 financial crisis however has brought other changes. The Independence Party that had ruled for around 20 years was ousted and replaced by the Leftist-Green party. The Social Democrats, the Independence Party’s junior partners in government prior to the collapse, managed to stay in power and became the senior partner in the new government. This brought about the first truly leftist government in Iceland since the 1980s. Naturally government policies changed considerably.

Changes to Fishing Regulations

One of the cornerstones of the socialist government’s policy was changing the fishing-quota system. Since its inception in the 80s the quota system has lead to a heated debate in Iceland. Although no-one disputes the need for some kind of system that limits the fish catch there are differences in opinion on how such a system should be structured. A central argument is how the system would distribute the wealth created from the fisheries; should it go to the firms themselves and their owners or should there be some scheme in place to redistribute it amongst the overall populace.

The changes proposed in a bill by the leftist government during the fall of 2011 were in tune with the latter view. One of the most disputed change was the proposed increment of fishing fees. Fishing fees are charges paid to the government in exchange for each kilogram of fish catch. Traditionally these fees have almost been a negligible amount compared to other taxes imposed upon firms by the government. The government’s proposal however aimed to increase these fees enormously. These changes were intended to transfer most of the rent earned by the fishing industry to the general public.

In addition to increasing the fishing fees the new bill also planned major modifications to the current quota system. The total quota would now be divided into two groups, A and B, where group B would be the property of the government and distributed as it saw fit. Needless to say this would have led to decreased availability of quota on the market and reduce the efficiency of the system as a whole as the government distributed its share based on political rather than economic reasons. This in turn is likely to cause increased concentration in the market, strengthening large corporations and seriously reduce the number of small and mid-size firms. The bill also proposed to limit considerably the ownership of shares of the quota, the government reserving the right to appropriate the quota at any time, as well as implement a sales tax on all shares of quota exchanged between private parties. This naturally would limit the ability of owners to sell their shares of the quota on the market, one of the main prerequisites for efficient fishery management according to experts.

Proposed changes met with opposition

The proposal naturally caused a lot of discontent within the fishing industry. Many stated that the increase in the fishing fees were unsustainable and would drive many firms into bankruptcy. Accounting firm Deloitte analyzed the effect of the increased fees and the result was a report that gave a very dark view of the situation within the fishing industry post-changes. This was in stark contrast to the governments own reports on the matter which stated that although there would be some bankruptcies the fishing industry would not be too adversely affected by them. There were also numerous other reviews of the bill by government institutions, professors, businessmen, labor unions, municipalities etc., most of which were firmly against adopting the proposed changes.

Despite facing serious opposition the government was still reluctant to adjust its plans. One of the biggest reasons for this was that the proposed budget for 2013 already contained the revenue forecast from the fishing fees and without them there would be a considerable deficit. Much of the fishing fees though had been earmarked for big construction projects, many of them around the very same towns and municipalities that would pay most of the fees. Some even alluded to these projects being intended as bribes in order for the government to be able to enact the changes to the fishing management.

The government is brought to the negotiation table

Unwilling to scale back its construction projects and still paying down debts accumulated by the 2008 crash the government naturally could not afford a national deficit. Moreover, further cutbacks in government expenditure were not an option since large cutbacks in the past had already made the government immensely unpopular.

During mid June, with protests in the capital and increasing pressure from the fishing industry the ruling parties finally relented and announced a meeting with the opposition parties. There, an agreement was finally reached. The fishing fees were still to be increased, but not by as much as first planned and with more leeway given by extending the adoption period given to the fishing industry. As for the other changes, they were postponed until the Icelandic legislature will be in session again in September. Meanwhile the Icelandic fishing industry is left in a state of great uncertainty leading to a reduction in investments as well as other economic losses.

Conclusion

With fisheries being the backbone of the Icelandic economy, it shouldn’t come as a surprise that some disagreements have taken place over its regulatory environment. These disputes have nevertheless cast an unduly shadow on the sector’s success in the past years.  The levels of efficiency reached with the current fisheries management system have received attention from the global fishing community and the catch limitation system is commonly considered the cornerstone of the fisheries management system. This success now seems to come with a price; taxing which may limit future investments and R&D.

It’s therefore no surprise that badly planned changes such as those proposed by the government are met with great opposition by those involved. The government was ready to negotiate last June but the final decision on the changes has yet to be made. Anyone with experience or knowledge of fisheries management can tell that the proposed changes would lead to the reduced efficiency of the whole sector. To avoid this step backward is the challenge that awaits this coming September when the legislature finally reconvenes.

By Haukur Már Gestsson & Jón Guðjónsson