The IMF suggests that Iceland raise VAT on food from 7.0% to 25.5%. This will hit food producers and retailers hard and send yet another shockwave of bankruptcies through an already bleeding economy. The line for food from support centers has been increasing since the collapse and this may make it even longer. The problem is that with increased VAT, food producers are likely to cut back on their support for these shelters which threatens to create a very serious situation in Iceland. May food producers that are already operating on slim margins are almost certain to close shop.
The side effects of this move is increased overhead on businesses running own kitchens, a drop in restaurant traffic, a rise in tourist expenses which makes Iceland a less attractive destination, and an overall contraction of value generation that has broader impact than a natural disaster similar to the one that hit Japan. It also sends inflation upward, which increases the debt burden on indexed loans forcing more into bankruptcy. If the VAT raise goes through, Iceland is finished.
This raises the question: Who is the government working for and toward what end?