Iceland Economic Snapshot

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Investment in research and development (R&D) is a key determinant of productivity and competitiveness. Over the past decade, OECD countries have made a significant effort to boost business-driven innovation, relying extensively on tax incentives. Iceland stands out as one of the OECD countries with the highest increase in total government support for business R&D between 2006 and 2020, mainly driven by the introduction of a R&D tax incentive scheme in 2010. This study presents the findings of an evaluation of Iceland’s R&D tax incentive, assessing the economic impact and the implementation of the scheme. The study shows that the R&D tax credit is effective in incentivising businesses already engaged in R&D to invest more. Some targeting of the R&D tax support, greater clarification of eligibility criteria and improved data to monitor and evaluate impacts could strengthen the scheme. The study was jointly conducted by the Economics Department (ECO) and the Directorate for Science, Technology and Innovation (STI), with the support of the Ministry of Finance and Economic Affairs and the Ministry of Higher Education, Industry and Innovation.

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Iceland’s economy is one of the fastest-growing in the OECD, driven by foreign tourism and strong domestic demand. The labour market is tight and wage growth robust, while high wage compression helps maintain a highly egalitarian economy. Inflation is persistent and broadening, and inflation expectations have de-anchored. The fiscal stance is tightening but consolidation could be faster to support monetary policy. Despite progress, barriers to entry remain in many sectors.

• Iceland: taming the inflation spectre, blog
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