THE austerity-driven budget for 2012 aims to achieve a public deficit of 2.8 per cent of GDP, but that’s contingent on several ifs.
Unveiling the draft of the state budget yesterday, Finance Minister Kikis Kazamias urged parliament to approve the plan as is, to ward off possible further downgrades of the national economy.
“We are confident that before the end of the year you shall make your decisions, and I appeal for your positive response to the government’s proposal,” Kazamias told House Speaker Yiannakis Omirou on handing him the budget.
On Wednesday, the IMF warned that Cyprus needed to take urgent action to shore up its economy, calling on authorities here to redouble their efforts to avoid fiscal slippage caused in part by the banking sector’s exposure to Greece.
“The consolidation of public finances must be speeded up through the promotion of credible, structural measures that will have an immediate impact. These measures must ensure macro-economic stability and an unhampered growth of the economy,” the Finance Ministry said yesterday.
Authorities have revised their forecast for the public deficit to 2.8 per cent of GDP from 2.3 per cent initially, citing the effects of the continuing global financial crisis. In 2012, the Cyprus economy is set to all but grind to a halt, growing by a rate of just 0.2 per cent – down from 1 per cent as initially forecast.
The 0.2 per cent figure falls well short of the 2.5 per cent cited by Cyprus in the Stability Programme it submitted to the European Commission.
The House Finance Committee begins its scrutiny of the budget on Monday, amid a tense political climate with ruling AKEL lacking a majority in the House to pass the bill.
It provides for a 10.1 per cent increase in revenues compared to this year, reaching €6.2 billion. Direct and indirect taxes account for 86 per cent of expected revenues.
Expenditures are set to drop by around 6 per cent compared to this year, to €7.54 billion.
Public expenditures, as a percentage of GDP, will be limited to 39.4 per cent compared to 44.1 per cent.
Abolishing a number of vacant positions in the public service and increasing social security contributions will keep expenditures allocated to government employees to 14.5 per cent of GDP (down from 15.1 per cent).
Government plans to increase civil servants’ contributions to the widows’ and orphans’ fund should further decrease this sub-category of expenditures to 13.9 per cent of GDP.
The suspension of payment of Cost of Living Allowance (CoLA) to government employees for the first six months of 2012 would further drive the deficit down to 13.4 per cent of GDP, the Finance Ministry said.
Despite taking up a smaller portion of GDP as a whole, expenditures for government employees will still rise by 3 percentage points compared to 2011.
The budget sees a significant trimming of welfare spending, by 14.7 per cent, and incorporates a deal struck between the President and the parties providing for: spending ceilings for ministries and government agencies for the period 2012-2014; a provision to reduce entry-level pay grades for civil servants by 10 per cent; abolishing some 900 vacant positions previously allocated to temps in the civil service; and means-testing for recipients of student grants and child benefits.
Other additional sources of income include: a 5 per cent VAT levied on private medical practitioners; privatisation of the state lottery; and licensing fees for plots within Cyprus’ Exclusive Economic Zone (EEZ).
Kazamias revealed the government would initiate the second round of licensing for the EEZ blocks “very soon.”
But achieving a deficit of 2.8 per cent of GDP would depend on parliament approving a bill raising the VAT rate to 17 per cent, Kazamias stressed.
Without this 2 per cent hike, he said, the deficit would increase to 3.8 per cent of GDP.
Joblessness next year is set to worsen slightly, reaching 7.5 per cent compared to 7.3 per cent this year, with the rate of inflation dropping to 3 per cent from 3.5 per cent this year.
