Færøudvalget 2015-16
FÆU Alm.del Bilag 22
Offentligt
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BÚSKAPARRÁÐIÐ
Á vári
2016
Búskaparfrágreiðing
I. Konjunkturmeting
II. Greiningar viðvíkjandi arbeiðsmarknaðinum
III. Greiningar viðvíkjandi kommunum
Mars 2016
Economic report from the
Economic Council of the Faroe Islands,
Spring 2016, with Executive Summary in
English: (I) Economic outlook and special analyses of (II) the labor market, and (III) the municipalities
Redegørelse fra det
Økonomiske Råd på Færøerne,
forår 2016: (I) Udsigterne for konjunkturudviklingen,
og særlige analyser af (II) arbejdsmarkedet og (III) kommunerne
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English Summary
SHORT TERM ECONOMIC OUTLOOK AND ANALYSES OF THE LABOUR MARKET AND MUNICIPALITIES
Chapter I of the Report
provides an evaluation of the short-term economic trends in the Faroes.
The trends in the Faroese economy over the last few years have been unusual. Thus, it has been
difficult to generate accurate short-term analytical projections. This semi-annual review concludes that
GDP growth in current year prices for 2015 and 2016 is somewhat higher than projected in the last
report.
The report on the economic outlook is organized around elements of the demand side (expense side) of
the country’s Gross Domestic Product (GDP). Overall aggregate demand for goods and services is based
on two factors: domestic demand for consumption and investment, and foreign demand for exports.
Statistics Faroe Islands and The Economic Council have jointly estimated
GDP economic growth in
current prices for 2014-2017.
To facilitate the projections, an economic model was used, which was
developed by the former Faroese National Bank (Landsbankin) and Statistics Faroe Islands and is
currently maintained jointly by The Economic Council and Statistics Faroe Islands. The Table below
captures the projected growth in GDP in current year prices for the period 2014-2017 and the driving
forces behind this projected growth.
2014
Estimated GDP growth in current year prices:
Growth derived from:
5.8%
Foreign
demand
2015
6.2%
Mainly
domestic
demand
2016
5.3%
Domestic
demand
2017
2.9%
Domestic
demand
While consumption has been the most stable aspect of domestic demand, investment has been the
most fluctuating. Public sector investment in the Faroes, as a part of overall domestic demand, has
traditionally correlated positively with the business cycles. This cyclical pattern has always been
detrimental for the economic development, and it would appear that the pattern is again being
repeated, given that the investment plans for the central government and the municipalities are quite
comprehensive for 2016 and 2017. There would appear to be the need for a coordinated re-evaluation
of public investment plans.
For some time now, the Faroes has been experiencing a greater trade surplus than in the past. One
reason for this is improved terms of trade in the foreign trade, derived from increased farmed salmon
prices and lower oil prices. Also, an increase in quantities in the pelagic fisheries has influenced the
result. Given these circumstances, the national fiscal accounts should show a very large surplus, which
they do not.
The use of the revenue generated from the pre-taxing of pension savings disrupts the true picture of
the government’s financial sustainability. If the revenue from the pre-taxation of pension contributions
was not used to finance actual public-benefit expenditures, then the result of the governmental
accounts is around DKK 300 million worse than actually booked, and this should be the basis upon
which to measure the overall balance and deficit/surplus of the national budget.
One is a short-term perspective, the other is a long-term economic outlook. As noted in previous
reports from the Economic Council, changes to the country’s demographic occur slowly year upon year.
Therefore, there is a danger that if we focus only on the short-term instead of understanding the
consequences of these demographic changes for the long-term fiscal sustainability and viability of the
public accounts, it may be too late; already around 2035 we should anticipate a negative excess of
births.
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The initiatives undertaken by the central government up to now could be deemed logical and
appropriate, but in the main they have not had any major impact on the country’s fiscal sustainability.
For example, the transfer of pension payments within the public accounts has no impact on the
sustainability/vulnerability of the national accounts. In order to, for example, ensure greater
sustainability, the pre-tax revenue from pension savings should 1) be used to reduce debt, 2) be set
aside in trust for later use, or 3) the pension tax scheme itself should be revised to levy a tax at the
time of actual pension distribution. We understand that work is underway on a new pension system and
a new fisheries system, but new industrial policy initiatives could also be relevant in mitigating or
resolving the problems of fiscal sustainability in the public accounts. Moreover, there is a need to
coordinate all the reform endeavours being undertaken; for example, the new fisheries system could
also have a considerable impact on the fiscal sustainability of the public accounts.
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The goal of Chapter II of this Report is to elucidate certain aspects of the Faroese labour market, which
possibly could offer a basis upon which to estimate where or how employment in the Faroe Islands (i.e.
the number of jobs and the manpower for those jobs) could increase and thereby potentially address
and rectify the sustainability constraints inherent in the Faroese economy. The study is mostly based on
analysis of data from the population census 11.11.2011, and data from the Faroese Tax Authority for
the year 2014.
The Faroese labour market has, among others, these key concurrent characteristics: 1) a large portion
of the resident manpower works for foreign employers abroad, while a relatively large number of
foreigners work in the Faroes; 2) a part of the potential Faroese labour force is or has been studying
abroad; and 3) the gender and age composition of the population is extremely disproportional. These
same key characteristics are found in isolated regions in other Nordic countries, without, however,
disrupting their financial sustainability. In the main, this last characteristic is addressed directly by the
State and the most financially prosperous municipalities.
The Ministry of Industry, the North Atlantic Group of the Danish Parliament and
Jobmatch
have
undertaken a number of initiatives to investigate or enhance the attractiveness of the Faroe Islands
(vis-à-vis Denmark) as a place to live and work, especially for those currently living abroad. Although
the attractiveness and allure of the Faroes is certainly a relative factor, by itself it is not enough. In
truth, the attractiveness of the Faroes can be as great as the country can envision it. But if there
continues to exist a limited number of jobs in the Faroes (whether for those resident in the Faroes or
for those willing to move), then but little will be achieved. What more can be done to stimulate the job
market? This question was not fully addressed in the report of the Ministry of Industry,
Fólkaflyting og
fólkavøkstur
(Migration and Population Growth).
Another characteristic of the Faroese labour market is that part-time work is very common, especially
among women, including women who desire to work full-time. Also, there is a significant gender bias in
wages. More women than men are seeking higher education.
The Faroes is not lagging behind other Nordic countries with regard to the level of education found in
the country. Relative to types of education, a rather large proportion of Faroese are educated in the so-
called “transport services”, which includes, among others, navigators and marine engineers. The choice
of education paths (trade/technical, upper secondary, higher education) is to a certain extent impacted
by business cycles and therefore the availability of both space in training programmes and work.
With regard to educational choices, for many pursuing higher education there is but little
correspondence between the number of students and the number of comparable jobs that will become
available over the coming ten years because of retirement. If there is no change in the current situation
regarding in the Faroes relative to the availability of work for those with higher education (including
recruitment habits), there will be no work in the Faroes for around 40% of those who are now seeking a
university education. The situation varies relative to the type of education pursued. Reflecting this,
statistics from STUDNA relative to students in higher education shows that only 50-60% of the students
who completed their education abroad returned to the Faroe Islands to live. A study conducted in 2009
by the North Atlantic Group in the Danish Parliament on the first generation of those living abroad
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between the ages of 20-45 and who were also either working or studying (2,502 people) indicated that
around half of these individuals desired to return to the Faroes to live. This number (50%) corresponds
well with the actual STUDNA data regarding those who return to the Faroes after completing their
higher education abroad.
For the entire population (i.e. people registered by various education, industry and job-position), the
average monthly wage is DKK 26,000. On average, 21% of the population will reach the retirement age
of 67 by 2024.
For people with various types of
education,
the average wages clearly tracked their respective
education. However, one major exception was the average wages for those with technical educations.
On the other hand, those who were trained caregivers received proportionally lower wages. The
percentage of workers who will reach retirement age (67) by 2024 is quite large for those with
healthcare education and for people with only an elementary education.
For individuals in the various
business sectors,
the highest average income was found in the natural
resources industries (including fishing) and ocean transport. The lowest average wages were in the
business sectors “hotel and restaurant”, “retail sales”, and “childcare”. Of those who will reach
retirement age by 2024, the highest percentage is for those working in the industry sector “adult
caregivers”, and it is equally large in the sectors,
e.g.,
“elementary education”, “hospitals” and “general
services”; more than 4,600 people work in these four business sectors alone.
Relative to the different
occupations,
people in management and technical positions receive the highest
average wage; this is also true for people in accounting and administrative positions. On the other
hand, the lowest paid workers are those in occupations such as “cleaning”, “caregivers”, and “retail
sales in stores”. The percentage of those who will reach retirement age by 2024 is largest in the
positions,
e.g.,
“cleaning” and “caregivers”, and very low for such positions as,
e.g.
“retail sales in
stores”.
For individuals receiving only income from abroad, the average monthly wage (from aboard) is DKK
41,000, which is considerably greater than the average monthly wage for the entire population (DKK
26,000). Wages in this regard equates to taxable income.
With regard to foreign-earned income, the highest average wages are paid to individuals with nautical
and technical
education,
but individuals with only elementary education also receive high wages. Based
on
business sectors,
the highest wages are found in the petroleum industry, the fishing industry and
ocean transport. For the various
types of occupation,
the highest wages are for technical jobs (including
navigators and marine engineers) and engineers in general.
According to the updated February 2016 tax registry of the Faroese Tax Authority, foreign-based
income was 9.2% of all taxable income in 2014. At the same time, while there was significant growth in
foreign-based income all the way up to 2013, the wage payments from the Faroes to foreign nationals
also grew, especially in 2014. The number of foreign nationals working in the Faroe Islands
consequently has grown significantly since 2011.
To overcome the longer-term fiscal sustainability problem inherent in the public accounts, through
increased GDP growth through employment, it is self-evident that this will require a large number of
new sustainable jobs within a not too distant future. This, of course, provides an enormous challenge,
but employment surges are not totally unknown in Faroese economic history (during the period 1989 to
2004, some 7,000 jobs were lost and created).
These analyses of business structure, education, industry and jobs suggest that there may be space for
several additional businesses (and the associated jobs and educated employees) in the private tertiary
business sector – businesses that potentially grow out of the primary and secondary business sectors.
More research in this area is necessary to corroborate this conclusion.
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Chapter III of the Report provides a short summary of the issues surrounding fiscal harmonization
among the various municipalities, and offers several scenarios addressing these harmonization issues.
When the administration of elder care was placed with the municipalities on 1 January 2015, a guideline
was issued to govern the financing of elder care in the municipalities. This financial guideline appeared
to be a solution that took into partial consideration the expense items within elder care, and it also
addressed the imbalances in the tax revenue base of the various municipalities.
At the same time this financial guideline was being implemented, a third governmental authority arose
parallel with both the municipal and central government authorities – namely the eight service areas
within elder care. Thus, it could be said that the Faroes went from a two-pronged to a three-pronged
division of the Governmental sector. Including the Danish realm and social funds, the Faroes went from
a four-pronged to a five-pronged division of the government sector.
The question arises whether or not such a situation is necessary in such a small country as the
Faroes.With clearly defined burden and task responsibilities between the central government and the
municipalities, and with fewer and larger municipalities, a three- or five-pronged segmentation seems
unnecessary. With fewer and larger municipalities, a harmonization system could be implemented that
would encompass all the expense items and all the revenue sources.
One possibility for harmonization among the municipalities is a block grant programme. Thus, according
to this plan, the central government could finance harmonization and allocate additional funds to those
municipalities that would otherwise be unable to adequately address or finance their respective elder
care obligations, because of excessive expense or insufficient revenue, relative to a so-called “average”
municipality.
Another possible method to address fiscal harmonization is an inter-municipal harmonization
programme. According to this type of programme, the municipalities themselves would finance
harmonization among the different municipalities. In such an inter-municipal harmonization
programme, the municipalities that are financially better off (relative to elder care expenses and
revenue base) would transfer funds to those municipalities that are financially at a disadvantage and
less able to meet their respective elder care obligations.
The statistical data further reveals the vast differences between the municipalities relative to taxable
income per resident, as well as the relative proportion of residents over 80 years of age, and the
number of young people between the ages of 0 to 17.
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