Iceland - Domestic policy

Oddsson's continued popularity has been attributed to his astute handling of Iceland's economic situation. Prime Minister Oddsson's largest challenge was to bring Iceland out of its economic recession. The austerity measures instituted by the previous Prime Minister Hermannsson were very unpopular. Yet trimming the Icelandic welfare state has continued under Oddsson. The retirement age was increased from 65 to 67, with further increases in age eligibility on the horizon. However, Oddsson has also continued to work on programs of tax reform that have made the personal income tax in Iceland one of the lowest in Europe.

Policies of market liberalization, public sector rationalization, privatization, and other structural reforms that fostered entrepreneurship, investment, and growth have resulted in a 38% growth in economy from 1992–2001. Per capita GDP (measured at purchasing parity prices) reached US $29,000 in 2001, one of the highest in the European Community; estimates indicated a modest decline, to US $27,100, in 2002.

With nearly 70% of export earnings coming from the fishing industry as of 2002, fluctuating world fish prices make the Icelandic economy particularly vulnerable. Negotiations with the EU under the EEA on access to the EU's markets for Icelandic fish products have been instrumental in fostering economic growth, as has diversification into nascent technological industries. Under the EEA, Iceland has had to liberalize many areas of the economy, from telecoms to banking (but not fisheries and food sectors).

In 2003, after more than a year of negotiations and despite harsh criticism from environmentalists, the government gave approval to the U.S. corporation, Alcoa, to build a power plant and aluminum smelter in Iceland's Eastern Highlands. The government stated that the new development would provide long-term employment for hundreds, and temporary construction jobs for thousands more in a region that is economically depressed, and that the economic benefits will outweigh the environmental risks.