Icelanders Head to Polls in Election Centered on Economy

(Bloomberg) — (Bloomberg) — Icelanders are heading to the voting booths in a snap parliamentary election on Saturday that looks poised to redraw the political landscape due to discontent over high costs of living even amid a cooling economy.

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Issues including elevated inflation, housing shortages and long hospital queues after a post-pandemic boom have dominated the short campaign following the dissolution of the ruling coalition last month. Even as the island’s central bank last month started easing the highest interest rates since 2009, the voters’ frustration is set to benefit the opposition.

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Polls show the Social Democrats in the lead, backed by about a fifth of the electorate, on pledges to get inflation and state finances under control while also strengthening the welfare system. The party that also vows to close tax loopholes is led by 36-year-old Kristrun Frostadottir, a Yale-educated former chief economist of Icelandic investment bank Kvika hf. 

Polling neck and neck with the Social Democrats, the Liberal Reform Party has campaigned on the platform of responsible state finances, seeking to sell state-owned lender Landsbankinn hf to lower public debt. Steered by lawmaker and former education minister Thorgerdur Katrin Gunnarsdottir, 59, it similarly backs resource fees on the energy and fishing sectors and is seen as a likely partner for the Social Democrats in any alliance.

A vote winner in Iceland doesn’t automatically get the first stab at forming the government, meaning a prospective prime minister will not be known for some time.

While incumbent Prime Minister Bjarni Benediktsson’s right-wing Independence Party has traditionally dominated the island’s politics, its seven-year-old coalition with the Left Green Movement and centrist Progressive Party fell apart after infighting over tightening immigration, continuing whaling and boosting energy generation. The Left Greens are now struggling to meet the 5% parliamentary threshold.

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The north Atlantic nation has long been vulnerable to boom-bust cycles. The global financial crisis that followed the bankruptcy of US investment bank Lehman Brothers in the autumn of 2008 crippled its out-sized banking sector and almost wiped out the domestic stock market.

The outgoing government steered the country through the pandemic that temporarily disrupted its tourism cash cow, followed by a 20% economic expansion in 2021-2023 and inflation peaking at more than 10% last year. Even as Benediktsson’s cabinet delayed its budget surplus goal to 2029 from 2027, western Europe’s highest borrowing costs — at 8.5% — have pushed the economy into a 1% contraction this year through September.

Meanwhile, the authorities bought out all residential properties in the fishing town of Grindavik, which became uninhabitable after a string of volcanic eruptions rocked the island’s south-west corner since late last year. While inflation has slowed to 4.8%, housing prices keep growing at 8.7% on year, fueling voters’ resentment.

The Independence Party, continuously in the government since 2013, is still projected to gain around 16% support, a clear drop from the 2021 elections when they received almost a quarter of votes. It vows to cut state involvement in the economy, lower taxes and reduce red tape, while also strengthening border controls and restricting asylum policy. 

The populist and right-wing Center Party, led by former Prime Minister Sigmundur David Gunnlaugsson, runs on a similar platform and would be a likely ally for the Independence Party.

There’s a small chance voting will take place on Sunday in some locations due to adverse weather that’s been forecast for the election day.

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