HOW IRONIC that on the same day that the Council of Ministers approved its ultra-generous child benefit payments, the Governor of the Central Bank was sounding a warning about Cyprus’ widening fiscal deficit and the urgent need for unpopular economic measures to reduce it. The conclusion was glaring — the government was spending money it could not afford, when it should have been looking for ways to cut its expenditure.
Predictably the political parties completely ignored the warning by Governor Christodoulos Christodoulou (they hate bad news), as they were all competing to take the credit for the latest example of state largesse. Government backer AKEL congratulated President Tassos Papadopoulos for fulfilling one of his pre-election promises and waxed lyrical about the new government’s commitment to helping low income groups. Opposition DISY also welcomed the move, insisting that the government had adopted the party’s position in favour of giving child benefits to all families, without setting any income criteria.
Income criteria have been set only for the granting of supplementary child benefits to low-income families. According to finance ministry estimates, 55 per cent of families will be entitled to the supplementary benefit. Finance ministry sources said that the annual cost of this ‘social’ measure would be in the region of £81 million, which would be adjusted at the start of every year to take into account the cost of living index. There is no doubt that this expenditure will put added pressure on public finances which are not in a very healthy state. Last year, the fiscal deficit was £215.7 million (3.5 per cent of GDP), while this year Christodoulou expressed fears that it could exceed four per cent, without taking into account the new child benefit bill.
This is well above the target of three per cent of GDP set by the Maastricht guidelines. Certain economists have argued that the government should not be too bothered with Maastricht targets at present, especially as the economy is slowing down, and Cyprus, after all, is not yet an EU member. While they may have a point, it would be highly irresponsible to adopt such a view given the general lack of discipline when it comes to government spending. At least making an effort to comply with the Maastricht criteria provides a type of safeguard against irresponsible populist politicians, who wholeheartedly advocate additional public spending irrespective of whether the funds exist.
The politicians’ ‘spend, spend, spend’ philosophy is part of the problem. When AKEL was still in opposition it constantly criticised the previous government for not giving more money to pensioners, housewives, university students, refugees, low-income earners and big families, but not once did it suggest how such welfare payments could be funded. DISY was not much better, also competing to prove its commitment to high public spending, and constantly boasting about the previous government’s spending record.
It was thanks to the parties’ irresponsible populism that last year’s tax reform package was turned into a liability and caused the increase of the deficit. The Clerides government had increased VAT, but tried to balance this by lowering direct tax rates and raising the income tax threshold. The parties, in order to approve the package, made amendments to it (giving out much more money than the government had made provision for) with the result that state expenditure was much higher than revenue. They were happy to take the credit for this mindless generosity and still blame the government for the widening deficit.
Even now that the warning has been sounded and corrective measures are imperative, the politicians prefer to put their heads in the sand. The situation, as we have been arguing for months, is not good. The public debt is already too high (without accounting for the hundreds of millions the state has been borrowing from the social insurance fund) so how could the deficit be brought under control? The obvious solution would be through higher taxation, but that would further slow down the struggling economy. Raiding the cash reserves of CyTA and the Electricity Authority is only a short-term solution.
As there are no obvious ways to raise revenue, the only alternative for the government should be to reduce its spending. The development budget should be drastically cut and all defence purchases frozen for a couple of years. This would give the government some breathing space so it can tackle the greatest drain on resources — the public service which accounts for more than 60 per cent of government expenditure. There should be a three-year moratorium on new appointments, a voluntary redundancy scheme, and a wage freeze; the abolition of the Cost of Living Allowance would also reduce the public sector wage bill. The streamlining of the public sector could be achieved by contracting out to the private sector services normally provided by the government.
Radical reforms such as these will require time and planning; they may also spark social unrest which will have to be dealt with. For the necessary transitional period, the government could raise hundreds of millions of pounds by selling off state-owned companies such as CyTA, the Electricity Authority, and Cyprus Airways. Such measures may carry a high political cost, but the government needs to put the interests of the country above electoral considerations. It must also try to secure the support of the political parties, which bear a large share of the responsibility with their ‘spend, spend, spend’ philosophy, for the precarious state of public finances.
The government must act now if we are to prevent the much-vaunted economic miracle of Cyprus turning into nightmare. We must learn to live within our means, irrespective of the political cost.
The Cyprus Mail is the only English-language daily newspaper published in Cyprus. It was established in 1945 and today, with its popular and widely-read website, the Cyprus Mail is among the most trusted news sites in Cyprus. The newspaper is not affiliated with any political parties and has always striven to maintain its independence. Over the past 70-plus years, the Cyprus Mail, with a small dedicated team, has covered momentous events in Cyprus’ modern history, chronicling the last gasps of British colonial rule, Cyprus’ truncated independence, the coup and Turkish invasion, and the decades of negotiations to stitch the divided island back together, plus a myriad of scandals, murders, and human interests stories that capture the island and its -people. Observers describe it as politically conservative.
