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Iceland Faces Headwinds in Reaching Budget Balance, IMF Says

Iceland faces “headwinds” in reaching a balanced budget next year as election promises boost costs and the economy grows less than projected, the International Monetary Fund said.

“The 2013 budget deficit target will be missed owing to slower than projected growth, expenditure overruns, and lower-than budgeted dividend payments and asset sales,” the IMF said today in an Article IV and post-program monitoring report. “The existing target of a balanced budget in 2014 may also come under pressure from costly electoral promises -- including those to lower taxes and to increase household debt relief -- the financing for which remains uncertain.”

The Washington-based IMF reiterated that the island needs additional cuts or tax increases equal to 1.5 percent of gross domestic product to achieve a fiscal goal of balance in 2014.

Cuts could be executed in the health and education sectors “without compromising the quality of outcomes,” it said.

Iceland, which completed a 33-month IMF-led rescue program two years ago after its 2008 financial collapse, has since outperformed the euro area in recovering from the crisis. The IMF last month also closed its local Iceland office, saying the country’s recovery was “well established.”

Iceland will post a deficit of 2.7 percent this year and 1.8 percent next year and the economy will grow 1.9 percent this year and 2.1 percent in 2014, the IMF forecast.

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