THE government yesterday officially unveiled a €750 million austerity package aimed at shoring up the economy, but it was not enough to avert a downgrade by ratings agency Fitch, which warned the island would need an EU bailout.
Opposition parties who also found the package inadequate said they would amend it or “bin it”, which prompted a reaction from unions who said they would take industrial action “the likes of which have never been seen before”..
The austerity measures include a 2.0 per cent VAT hike from 15 to 17 per cent, an increase in income tax to 35 from 30 per cent for those earning €60,000 a year or more, and higher tax on interest on bank deposits, Kazamias told lawmakers yesterday morning.
The minister said the measures would fetch some €150 million in 2011 and €600 million in 2012, adding that a second package will be put together in September.
“With the amount expected to flow in thanks to the adoption of the measures we propose in this first package, which is around €600 million… the public deficit for 2012 is set at 2.5 per cent,” Kazamias said.
Authorities had previously said that they were aiming at a general government public deficit of 4.0 per cent of GDP or less for 2011, down from a 2010 shortfall of 5.3 per cent.
But that forecast was made before a deadly munitions blast on July 11 destroyed the island’s largest power generation plant and slapped the state with a bill which, according to opposition parties, could reach €3 billion.
Kazamias said it would be impossible to meet the deficit target for 2011, adding that adoption of the measures would contain it to 5.5 per cent.
If the measures are not passed, the deficit will reach 6.5 per cent, the minister said.
He pledged that the government would try to bring the deficit down to zero by 2013.
The minister said civil servants would receive no pay increase for the next three years, and newcomers in the broader state sector would face a lower entry-level pay scale as well as higher social contributions
The package also provides for a 3.0 per cent annual contribution by civil servants for at least three years and an increase in their contribution to the widows and orphans fund.
Newcomers to the civil service will also start contributing to the social insurance fund “exactly the same rate as workers in the private sector,” the minister said.
“It is a decision of historical importance,” Kazamias said last night, after the cabinet officially approved the package.
But opposition parties, in a parliament where the government has no majority, say the package does not go far enough to address the structural problem of the state pensions system.
In particular, parties are peeved over a provision setting a 4.0 per cent contribution by state workers towards their government pension – they currently contribute nothing – which they say had been agreed in July but has since been removed.
Former government partners DIKO vice chairman Nicolas Papadopoulos has repeatedly said that the package would not be approved.
Papadopoulos said the government’s agreement with the civil service unions was the culmination of the destructive economic policy followed in the past three years.
“It is this catastrophic policy that brought the consecutive downgrades, 30,000 people in unemployment and our economy on the verge of bankruptcy,” Papadopoulos said, accusing President Demetris Christofias of undoing a deal struck with the parties in July.
Papadopoulos accused Christofias of deliberately leading Cyprus to the EU support mechanism so that others impose measures on Cyprus, allowing him to “put the blame on others and the bad EU.”
But while officials in Cyprus are arguing over the package, Fitch ratings yesterday downgraded the island by two full notches to BBB, citing risks the plan would not be fully implemented and that Cyprus would be effectively shut out of international debt markets from the second half of this year.
The downgrade provided more weapons for the opposition, with DISY deputy chairman Averoff Neophytou saying Christofias is managing the economy in the exact same way he had managed the munitions that exploded on July 11 killing 13 and knocking out the main power station.
Echoing Papadopoulos, Neophytou wondered if the President has consciously chosen to lead Cyprus to the support mechanism by destroying an economy built with the hard work of small and medium businesses and workers.
Parliament decided to vote on the measures on August 25, with parties expected to try and pass their own amendments, possibly prompting industrial action by the unions.
SEK, the union affiliated with DISY, warned yesterday they will react if anyone tries to impose measures or decisions taken in their absence.
Leftist PEO trade union also warned that any effort to impose arbitrary measures would only achieve “unnecessary social unrest.”
