THE GOVERNMENT needs to focus more on cutting public spending rather than increasing revenues if it is to meet its stability programme targets for reducing the public deficit, the European Commission (EC) said yesterday.
While welcoming the state’s willingness to bring the budget deficit down to below 3.0 per cent of gross domestic product (GDP) by 2013, Economic and Financial Affairs commissioner Olli Rehn said the government’s stability programme as submitted to the EC in April “aims to correct mainly by the revenue side, while expenditure is at a historically high level.”
However, Rehn said “there are downside risks to the adjustment path” due to over-optimistic growth forecasts, and “the favourable macroeconomic assumptions throughout the programme period may imply a lower contribution of economic growth to fiscal consolidation than envisaged”.
The government has based the measures contained in its stability programme on a forecast of 0.5 per cent growth in 2010, while the EC’s spring forecast published a week ago referred to negative growth of 0.4 per cent – almost a full percentage point’s difference.
The spring forecast also highlighted the fact the government had set the 2010 budget based on an assumed budget deficit of 2.9 per cent for 2009, but the actual figure was 6.1 per cent.
The EC’s report on triggering the excessive deficit procedure for Cyprus echoed Finance Minister Charilaos Stavrakis’ stated position that, without the proposed measures he is currently discussing with the parliamentary parties and social partners, the budget deficit would rise to 7.0 per cent in 2010.
The report said that the EC forecast of a budget deficit of “about 7 per cent” of GDP for 2010 did not take into account “potential extra-budgetary measures still under discussion with uncertain or no information on their modalities and timing of implementation”.
Based on this evaluation, the EC is urging Cyprus to “define a more expenditure-driven consolidation strategy”, do more to tighten fiscal policy and “control pension and health care expenditure as a means to improve the long-term sustainability of public finances.”
The EC’s formal comments on Cyprus and other countries now under the EDP come in a very special context: the sea-change in EU institutional thinking in the light of the Greek fiscal crisis.
European Commission (EC) President Josι Manuel Barroso said yesterday that a year ago, the EC had called for an improvement in the eurozone’s coordination of economic policies, which would involve “both deepening and broadening economic surveillance arrangements to guide fiscal policy over the cycle and in the long term and, at the same time, address divergences in growth, inflation and competitiveness”.
Referring to the need to “get to the root of the problem” of the current fiscal crisis in the eurozone, Barroso said: “At that time it was not so fashionable to speak about these issues. Today people accept it more openly. I think now we have the conditions to do it, because it really must be done now.”
