Updated Reykjavík City budget for 2026 indicates solid operations
The City Council majority's proposal for an updated budget was presented to the City Executive Council this morning. The proposal is based on Statistics Iceland's new economic forecast and changes to Reykjavík Energy's financial projections. The updated budget projects an operating surplus of just over 3.4 billion króna in 2026, down from 4.8 billion króna. The City expects to meet all financial policy targets and maintain balanced operations.
The proposal was referred to the second reading on Reykjavík City's budget for 2026 and the five-year period through 2030 in the City Council on Tuesday, Dec. 2.
The coalition parties presented new initiatives that reflect their key priorities of supporting children, families, and expanding social housing rental units.
Additionally, proposals were presented based on public and staff input on making more efficient use of city resources; these will be further developed by the City's specialized councils. The goal is to improve efficiency and increase financial flexibility.
New economic forecast
Revised budget assumptions align with Statistics Iceland's new economic forecast published Nov. 14. The updated economic forecast now projects lower economic growth, higher inflation, and increased unemployment. The forecast considers weaker export prospects following various operational setbacks in recent months.
The updated forecast projects 5.2% wage growth in 2026, about 0.7 percentage points higher than in the economic forecast that the Reykjavík City budget draft was based on.
Impact of Norðurál's payment default announcement to Reykjavík Energy
Reykjavík Energy presented a revised financial forecast for 2026 on Nov. 24 after Norðurál, the utility's largest single customer, notified the company that it would default on its payments due to repeated failures at its aluminum smelter at Grundartangi. Changes to Reykjavík Energy's financial forecast include:
- 1.0 billion króna lower operating profit this year than in the previous forecast.
- Operating cost cuts of 2 billion króna in 2026.
- 6 billion króna reduction in investments that year.
- Dividend payment reduction of 2 billion króna in 2026.
Section A – Core Operations' dividend plan was revised to align with Reykjavík Energy's financial forecast. The resulting impact is a reduction of 1.871 billion króna.
The impact of changed assumptions in Statistics Iceland's economic forecast on Reykjavík City's Section A – Core Operations budget mainly involves higher inflation, greater wage increases, and weaker labor market prospects. The effects increase municipal income tax revenue due to wage growth, but assumptions about employment levels have been lowered. The impact on pension liability expenses and financial items is negative.
Total impact of revised assumptions: about 1.3 billion króna
The total impact of Reykjavík Energy's revised financial forecast and Statistics Iceland's new economic forecast on Section A – Core Operations' operating results is estimated at negative 1.332 billion króna, lowering operating results from 4.763 billion króna to 3.431 billion króna, all else being equal.
Pension liability expenses and cost-of-living adjustments are non-cash items that don't affect Section A – Core Operations' cash flow, including working capital from operations. The total impact on Section A – Core Operations' cash flow is negative 217 million króna, lowering year-end cash from 17.061 billion to 16.844 billion króna.
All financial policy targets are expected to be met despite these changes.
"The updated budget demonstrates the city's responsible financial management, which will safeguard important services in line with the coalition parties' social priorities," the mayor said. "We will continue improving operational efficiency to free up resources for further housing development and finance increased services for vulnerable groups."
Initiatives to reduce staff sick leave
The updated budget proposal includes new initiatives to address illness and burnout among staff. The city will establish a special support team to assist managers at Reykjavík City workplaces with high sick leave rates and help them implement staffing solutions considering operations and workforce needs.
The support team's estimated cost is about 41 million króna, but expected cost savings from proactive absence management are projected at 480-800 million króna annually. Furthermore, reduced sick leave will reduce service disruptions and generally decrease stress on staff and managers.
Efficiency measures to create additional financial flexibility
Proposals based on public input received through Reykjavík City's Consultation Portal about better use of the city's time and resources were presented. These will be sent to specialized councils and central administration for processing and implementation.
The mayor's proposal recommends using financial gains to bolster the city's financial resilience and fund important strategic projects that align with department priorities and specialized council focus areas.