12. oktober 2026

Fiscal Sustainability Faroe Islands 2026 - Press Release

The Course Must Be Corrected as Public Finances Come Under Pressure

The fiscal sustainability indicator is estimated at -4 per cent of GDP. Unless revenues are increased or expenditure is reduced, a growing share of public expenditure will have to be financed through borrowing, resulting in a persistent increase in public debt. Within just ten years, the deficit of the general government sector is projected to reach DKK 1 billion. The fiscal sustainability challenge can be addressed, but it requires the political authorities to begin implementing targeted adjustments now.

A Deficit of DKK 1 Billion Within Ten Years

The fiscal sustainability indicator is estimated at -4 per cent of GDP in 2026. This implies that additional revenues must be raised, or expenditure reduced, by approximately DKK 1.2 billion per year on average if current welfare services are to be maintained in the future.

The result is conditional on the public old-age pension age continuing to increase and on public benefits rising at a slower pace than wages. The projection is not a forecast of what will happen, but rather a warning of what could happen if no policy measures are implemented.

The fiscal sustainability challenge arises because the number of older people is expected to increase significantly faster than the working-age population. These demographic developments will place considerable pressure on public expenditure in the future. Within ten years, the deficit of the general government sector is projected to reach DKK 1 billion, a substantial share of which is expected to fall on municipalities.

If the public old-age pension age is not increased in line with rising life expectancy, future pensioners will spend many more years receiving publicly financed benefits than they do today. The Economic Council therefore recommends that the political authorities implement the planned increases in the public old-age pension age in accordance with existing legislation.

How the Course Can Be Corrected

The Faroe Islands currently have a relatively low level of public debt. However, unless revenues are increased or expenditure reduced, an increasing share of public expenditure will have to be financed through borrowing, resulting in a sustained rise in public debt. Sound fiscal management is essential to prevent public debt from developing unsustainably. The Economic Council recommends the introduction of a fiscal framework covering both central government and municipalities.

One of the objectives of the mandatory private pension savings scheme was to generate future tax revenues for the public sector. In this respect, the Faroe Islands are at a disadvantage because pension contributions are taxed when they are paid into pension schemes. As a result, future pension benefits will generate less tax revenue than they would under a system in which pensions were taxed upon withdrawal. A deferred-tax system would have provided a stronger future revenue base, allowing the growing number of pensioners to contribute to the financing of public expenditure through taxation as pension benefits are paid out.

Another objective of mandatory private pension savings was to facilitate means-testing of the public old-age pension, thereby reducing future public expenditure. Means-testing improves fiscal sustainability because pensioners finance a larger share of their retirement income through their own private pension savings. The political authorities should therefore maintain the current means-testing arrangements.

The Economic Council recommends that payments from the public old-age pension and private pension savings be coordinated. Allowing individuals to avoid means-testing of the public old-age pension during the ten-year deferral period runs counter to the original purpose of mandatory private pension savings.

Investments that reduce future operating expenditure should be given the highest priority within the current investment framework. For example, costs within elderly care are relatively high in the Faroe Islands. If productivity in the public sector can be increased through measures such as larger operating units, enabling the same or better services to be delivered with fewer resources, fiscal sustainability will improve.

The Faroe Islands lose a substantial share of each generation because not all students return after completing their education abroad. Both these individuals and their future descendants will be absent from the Faroese labour force, exacerbating the fiscal sustainability challenge. Investments in a stronger educational environment and improved housing opportunities are examples of measures that may encourage more young people to establish their lives in the Faroe Islands.

Any policy measure that increases public revenues or reduces public expenditure can contribute to strengthening fiscal sustainability. Higher taxes on households and businesses may also play a role. For example, a larger share of the excess profits generated by the fishing and aquaculture industries could be captured as payment for the use of natural resources.

The fiscal sustainability challenge can be resolved, but doing so requires the political authorities to act now. The longer corrective action is postponed, the larger and more abrupt the necessary adjustments are likely to become.

 Read the report here