FINANCE Minister Kikis Kazamias yesterday urged lawmakers to approve the government’s budget for 2012 as is, warning that otherwise they would have to take part of the blame for the Cypriot economy plunging into a downward spiral.
In his 2012 budget speech before parliament, Kazamias pledged to reduce the public deficit to 2.4 per cent of GDP next year.
Under EU rules, a member-state must keep its fiscal deficit to 3 per cent of GDP; Cyprus’ shortfall currently stands at double that.
The new budget comes up for the vote at the plenum next Thursday – which also happens to be the deadline the Commission has given Cyprus for meeting its fiscal obligations or risk a €36 million fine.
“But more importantly, unless we recuperate our lost credibility as an economy, the markets will continue to demand prohibitive interest rates for financing, with all the negative consequences this entails,” Kazamias cautioned.
Urging opposition MPs – who have the majority in the House – to give the budget the nod, the Finance Minister said failure to do so would thrust the economy and the country into a deeper crisis, dubbing implementation of the 2012 budget as “crucial for our economy’s future”.
Kazamias said the necessary consolidation of public finances and cutbacks are expected to stunt growth in 2012, which will barely register at 0.2 per cent.
The new budget provides for revenes of €6.22 billion, compared to €5.65 billion this year. Direct and indirect taxes account for 86 per cent of this income.
Spending (excluding repayment of loans) will reach €7.54 billion, down from €8.02 billion this year.
Assuming the budget is implemented as planned, public expenditures as a percentage of GDP will drop to 39.4 per cent.
Kazamias outlined the government’s economic planning as consisting of three aspects: fiscal consolidation; maintaining growth in the medium-term; and ensuring social cohesion.
“Achieving these goals will be no easy task,” he qualified, noting that the national economy is subject to “external and unforeseen factors”.
“But we are cautiously optimistic. The Cypriot economy has shown in the past it possesses the flexibility and adaptability to cope under difficult conditions.”
Unveiling the 2012 financial blueprint, Kazamias said it provides for a 10 per cent reduction in paygrades for newcomers to the broader state sector.
The government has announced a freeze on civil servants’ salaries and cost of living allowance for the next two years, in a bid to rein in the state payroll. The IMF said recently Cyprus had to contain public sector wages, currently at 15.4 per cent of GDP – the highest public wage bill in the eurozone.
The 2012 budget also provides for the introduction of a binding clause specifying a ceiling on spending by government ministries, departments and agencies for the period 2012 to 2014.
On the revenues side, the budget provides for a 2 per cent increase on VAT (currently at 15 per cent), although Kazamias rejected criticism that the plan was tax-heavy, noting that even with 17 per cent VAT Cyprus will still have the second-lowest levy among EU states.
In 2011 the rate of unemployment is set to reach 7.5 per cent, with inflation around 3.5 per cent.
Kazamias said several causes have contributed to the rising inflation, including the increase in prices of raw materials, a 5 per cent VAT on foodstuffs and medicines, the 8 per cent VAT on hotel and restaurant services, and the Mari blast of July that knocked out the island’s main power station, driving up electricity bills by around 9 per cent.
In 2012 the public debt is forecast at around 67 per cent of GDP, compared to 65.5 per cent for this year.
Kazamias also referred to the repeated downgrading of Cyprus’ credit rating this year that has significantly increased the cost of borrowing from foreign markets.
He said a deal with Russia to borrow €2.5 billion on favourable terms was a “normal bilateral agreement” that would give Cyprus some breathing space to take the necessary fiscal and structural measures in a bid to reverse the repeated downgrading of the country’s creditworthiness and regain the markets’ confidence.
