THE MAIN criticism made against the state budget for 2012, under discussion at the House Finance Committee, was that its forecasts were over-optimistic. Someone could have made this claim, without looking at the budget, given past experience. All three budgets prepared by the Christofias government were over-optimistic, committing the same mistake – ignoring, each time, the recession and poor economic climate and thus failing to meet its fiscal targets.
The leadership of the finance ministry has changed since then, the perennial optimist Charilaos Stavrakis being replaced by the more pragmatic Kikis Kazamias, but old habits, it seems die hard. Although the initial forecast of a budget deficit of 2.3 per cent of GDP has been revised upwards to 2.8 per cent, there are still grounds to question the ministry’s forecasts, which are based on zero growth (0.2 per cent to be more precise). However, only a week ago a team of IMF economists, carrying out a survey of the Cyprus economy forecasted a shrinking of the economy by one per cent.
In other words, the likelihood is that the state’s revenue would also fall. If consumption is down, the two percentage point increase in VAT would not generate the revenue predicted by the government.
The mistake of relying on increased revenue to reduce the budget deficit has been committed every year by the Christofias government, despite being urged, by the EU to turn its attention to spending cuts. Cutting spending gives the government much greater control over its budget forecasts than relying on revenue increases which are affected by a host of outside factors.
No matter how many times the finance ministry has got its forecasts wrong, it still persists with the same unreliable way of managing the deficit. There would be some spending cuts in the coming year – small pay cuts for public sector workers and a drastic reduction in welfare payments – but would they be enough to keep the deficit below three per cent of VAT? The opposition parties, with some justification, do not think so and if Kazamias’ comments are anything to go by, neither does he.
This is why he has not ruled out the possibility of preparing a third package of measures, brought up the idea of taxing the retirement bonuses paid to public sector workers and spoke of plans to rationalise the Cost of Living Allowance. What is this, if not an admission that the budget provisions might not be adequate in meeting the government’s targets? It may seem an amateurish approach, but Kazamias conceding that more measures could still be needed in is a step in the right direction.
