THE RECESSION is officially over, and the extra government revenues resulting from the increase in economic growth will help to reduce the budget deficit further, Finance Minister Charilaos Stavrakis announced yesterday.
Stavrakis said that the preliminary growth rate announced yesterday by the Statistical Service of 0.4 per cent of gross domestic product (GDP) in the second quarter of 2010 compared to the previous quarter “confirms the government’s forecast that the recovery of the Cypriot economy has started very gradually, and is expected to speed up in the second half of the year.”
“Public finances automatically improve when economic activity increases. As the rate of economic growth goes up, the budget deficit shrinks by itself, because an increase in economic activity means an increase in state revenues through direct and indirect taxation”, Stavrakis said.
However, “what is certain is that any realistic scenario requires additional fiscal measures to improve the public balance of payments”, he added.
The revised growth rate for the first quarter was 0.3 per cent of GDP instead of the preliminary 0.1 per cent figure, following a 0.3 per cent contraction in the last quarter of 2009.
The minister said that although “the economic recovery has definitely begun, as demonstrated by the Statistical Service’s official indicators, we must certainly not relax our vigilance, as the external economic environment remains extremely difficult with a lot of challenges.”
He added that the government’s objective therefore was to continue its efforts to speed up the rate of economic growth while maintaining focus on reducing the budget deficit. “There is no choice but to improve public finances, which will be the only effective way to further increase Cyprus’ economic growth rate”, Stavrakis said.
Stavrakis said that the Statistical Service’s data showed that the positive growth was mainly generated by the financial services sector, as well as the broader services, tourism, wholesale and retail sectors. However, the construction sector is still contracting, although the rate is clearly improving compared to previous quarters.
The minister pointed to other signs of a burgeoning recovery. “The number of company registrations, which is a barometer for the provision of services to foreign clients, showed an increase of around 20 per cent in July compared to July of last year. Similarly, the number of transactions at the Land Registry also increased significantly, by some 20-25 per cent, which is one of the main reasons why the situation in the construction sector has clearly started to improve”, he said.
According to the Statistical Service’s preliminary figures presented by Stavrakis, 0.1 per cent growth was recorded in 2Q10 compared to the same quarter in 2009. However, Eurostat’s flash estimate published yesterday showed a contraction of 0.2 per cent in 2Q10 compared to 2009, based on seasonally-adjusted data that included a working-day correction.
Asked about the cautious optimism on growth expressed recently by the Central Bank (CB), which it based on the assumption that the government implements its proposed measures for fiscal consolidation, Stavrakis said although the CB’s views “always command respect”, we should all be careful “because there is a tendency for the Central Bank to behave like a political party”, and it would be bad for the economy if the government commented on the CB’s views.
The minister said that the CB’s economic forecasts “largely concur” with the government’s, and as political activity resumes after the summer vacation period, the government will engage in further discussions with the parliamentary parties and social partners “in an effort to arrive at those socially-fair measures which will improve the public finances.”
Meanwhile, he added, the government is proceeding with “extremely effective” measures that do not require the approval of the House of Representatives, such as cutting the state payroll through “natural wastage”, and controlling public spending.
Stavrakis said that the government appears to have already met its annual target of reducing the number of public employees by 1,000 after just seven months, and it intends to set a similar target for next year, as well as setting targets for “appreciably reduced” state spending on operational costs in the 2011 budget.
The minister clarified that one should take an overall view when talking about reducing the 60,000 employees in the broader public sector by 1,000 annually. “Savings are being made through a freeze on hiring temporary employees [to cover for vacant permanent positions],… people are taking retirement, and there was the recent Cabinet decision to do away with 406 permanent positions”, he said.
