THE ECONOMY has reached crisis point but with political consensus for fiscal consolidation focusing on curbing public expenditure, Cyprus can recover, said former finance minister Michalis Sarris yesterday.
Writing in an opinion piece for local paper Politis, Sarris said the repeated credit rating downgrades and significant increase in the cost of government borrowing made it pretty clear that the Cyprus economy was projecting a negative image.
“We have reached a critical point,” he said, adding, “Cyprus has effectively been excluded from international markets.”
Sarris noted the main reasons for the negative outlook were the serious concerns about the size and future path of the country’s public deficit and public debt.
There was a way out of the crisis but this involved taking measures now leading to an immediate, drastic and sustainable reduction in the public deficit while reversing the upward trend of the public debt.
More specifically, the country needed collective political consensus on a fiscal consolidation programme with clear targets: reduce the public deficit to 6.0 per cent of GDP in 2011 (compared to the current forecast of 7.0 per cent and original forecast of 4.5 per cent in the 2011 budget); aim for a 2.0 per cent deficit in 2012 and zero per cent in 2013 with a pledge to maintain it at zero or even reach surplus in the next five years.
The finance ministry is currently working on measures to achieve these goals, said the former minister, noting that a sustainable reduction in the deficit needed an emphasis on curbing expenditure.
“And this cannot be achieved without a significant reduction in the cost of the Public Service and the immediate targeting of social benefits without exception based on family income, with the imposition of penalties to act as a deterrent against deceit,” he said.
These measures could not be temporary but must be of a permanent nature to be convincing.
“The measures before parliament now are a step in the right direction and need immediate political support as they are. It goes without saying that their approval should be part of an agreement for implementation of a broader programme of fiscal consolidation,” said Sarris.
He further noted the experience of many other countries which showed that fiscal adjustments concentrating more on public expenditure and less on tax hikes have more chances of leading to a sustainable reduction of public deficit and debt.
This in turn strengthens consumer and investor confidence regarding the prospect of future tax hikes, leading to a drop in interest rates and the cost of borrowing.
He called on parliament to pass the bills tabled; on the government to present a binding fiscal programme with emphasis on reduced expenditure, and on ministries to ensure they remain within their reduced budgets.
