Iceland had to deeply reshape the public finances after the 2008 crisis, through both spending cuts and tax increases. The need to act swiftly and boldly left little room for appropriate design in the various spending areas. As a result, the quality of public spending – i.e. the contribution of spending to growth and less inequality - has declined. In particular, public investment remains weak, weighing on productivity, while the disability benefit system is generous, weighing on employment. Effectiveness of government spending is low, especially in education, with PISA results declining despite rising spending. This chapter identifies main challenges in spending for education, health, infrastructure, social security and other areas. Overall the authorities should strengthen the link between spending and objectives in the various policy areas, i.e. by broadening spending reviews. In particular, investment for transport, energy and digital infrastructure should be increased; in education, teacher salaries should be more differentiated and partially linked to performance; in health care, general care should be favoured against specialised care and co-payments for hospital care introduced; the disability system should more strongly aim at labour market integration of claimants; and high implicit tax rates in the tax-benefit system should be reduced, e.g. by abandoning means-testing of child benefits.