THERE were no surprises when finance minister Kikis Kazamias presented the state budget for 2012 on Wednesday. In fact it was a depressingly predictable budget, perfectly consistent with the short-sighted and incompetent way the Christofias government has been managing the economy for the last three-and-a-half years. As in the case of the previous two budgets of this government, its forecasts are based primarily on wishful thinking than any pragmatic analysis of economic conditions.
Nothing has been learned from the terrible mistakes of the past, which have led to repeated downgrades by all the ratings agencies and closed the doors of the international markets to Cyprus, whose government bonds are now being traded with a yield of 16 per cent. But the government continues to ignore the warnings of the agencies, having been thrown the lifeline of a €2.5 billion loan from the Russian government for early next year.
The loan, has allowed the government to carry on with its piecemeal, half-hearted measures as it would cover next year’s borrowing requirements. For the next few months, for which it faces a shortfall in the region of half a billion it will raid the local market, further reducing the availability of funds to the private sector. There will be an auction of treasury bills this week, with the aim of raising €100m and more will follow before the end of the year so that it can carry on paying public employees.
The government advertised its ineptitude by announcing that the budget would not meet the 2.0 per cent of GDP deficit target. Kazamias said it would be 2.3 per cent, but given how the government has consistently failed to meet its budget forecasts, it would be a minor miracle if it is kept so low. The signs are not good, as the opposition parties have said they would not to approve the increase in VAT, after the government watered down the original second package of measures it had promised to take. Without a VAT increase, the deficit would be 3.3 percent, in the best case scenario, but much higher if past experience is anything to go by.
As for the spending cuts, for which there is provision in the budget, they have not yet been finalised, the minister admitting that the bills for the 10 per cent cut in state welfare payments were still being prepared; the relevant ministries were still negotiating about these. In short, even these cuts might not reach the forecasted target, because the president might have a change of mind by the time the budget is submitted to the legislature next week.
Is this how the government hopes to upgrade Cyprus’ sovereign rating and eventually go the markets for its borrowing, or does it think Russia will always be prepared to bail it out? When it announced the last downgrade of the Cypriot sovereign rating in July, Moody’s said it would consider upgrading the rating “if the government is able to implement large-scale structural reforms in its social transfer system and the public sector wage bill and also record significant and lasting cost savings.” It warned however, that if the “recently announced changes to the structure of public finances are watered down, this could prompt Moody’s to further downgrade the sovereign rating.”
We hope we are wrong, but while the 2012 budget might prevent a further downgrade it is highly unlikely to lead to an upgrading of the sovereign rating, which would help boost business confidence, currently at an all-time low. The loan from the Russian government, assuming there is not sudden change of plan in Moscow, has allowed the government to ignore the warnings of the agencies, oblivious to the damage downgrades cause to the economy.
Then again, this obdurate refusal to tackle the structural problems facing the economy and put public finances on a sound basis, despite the continual pleas of the Central Bank Governor, former finance ministers, academics and the more responsible politicians, has become the banner of the irresponsibly, short-sighted Christofias government and is the root cause of the extended recession we have been in. Had we followed Ireland’s example – when it went for a bail-out, it cut all public sector wages by about 10 per cent and reduced public spending in one go – and put together a comprehensive package of measures at the start of 2010, we would have been on the path to recovery by now.
Instead, the Christofias government, urged by its union advisors, has prepared a 2012 budget that persists with the failed recipe of random, half-hearted measures which are guaranteed to prolong the recession, keep business confidence at rock-bottom and lead to more job losses. We can only pray that there will be no new downgrades as well.
