Our View: State development projects not the way back to growth

FINANCE MINISTER Harris Georgiades, presenting the state budget for 2015, was entitled to feel a sense of pride for putting public finances in order this year. The public debt was brought under control, the deficit targets set by the troika were met, the government was able to return to the markets and some stability was re-introduced to the banking sector. The fiscal discipline would continue next year, with the deficit forecasted to fall below the 3 per cent limit set by the EU and a small primary surplus being recorded.
Commendable as these achievements are, there was nothing in the budget to support Georgiades’ claim that “2015 will be a year of economic recovery”. Rate of growth is forecasted to be positive, but at less than one per cent it would be an unnoticeable recovery, when we consider by how much the economy had contracted in the last couple of years. The truth is that for the wealth- and job-creating private sector the budget contained nothing to cause even mild optimism, although Georgiades talked up the government’s decision not to impose new taxes in 2015.
This was presented as a big positive, but was it? We think not, given the taxes businesses and individuals are currently paying. They have been burdened with higher VAT, higher tax on fuel, higher social insurance contributions and the annual property tax among others. A real positive would have been the lowering of some these taxes – not all of them introduced by this government – as this would have given a small boost to businesses, raised confidence and, possibly, sparked a small recovery of the economy which everyone would like to see.
But in Cyprus, in which AKEL/union economic thinking has prevailed, none of the parties dare suggest anything as radical as tax cuts for businesses as a way of stimulating the economy, because they all believe that the only way to put the country on a growth path is by the state pouring money into the economy. The four parties –AKEL, EDEK, Alliance, Greens – who have said they would vote against the 2015 budget have all expressed the same main objection to it. It was not an expansive development budget, as spending on development projects was too low, they all said.
The idea was that the government should have wasted two or three hundred millions on building more roads we do not need or sewage systems in order to kick-start the economy (presumably, even the backhanders would have gone into circulation), because for the Cypriot parties only the state can create jobs. This is a correct conclusion given how the state has operated in the past, but it is also the reason for its eventual bankruptcy.
It is interesting to note that none of the parties which have been clamouring for a ‘development’ budget have suggested where the money for these projects would come from. They misleadingly imply that the funds are available, but the troika had instructed Georgiades not to spend them, something we know is not the case. If they were not such shameless populists, they would have suggested from where funds for the development budget could have been generated. For instance, they could have proposed cutting public sector wages and pensions by another 10 per cent as this would have raised more than €200 million for development projects.
In fact, Georgiades should have cut the public sector payroll by 10 per cent and announced tax reductions. This would have provoked a political storm and unrest in the public sector but it would have been welcomed by businesses and private sector workers who have felt the full force of the recession. Cutting taxes would also have had a positive impact on demand as it would have reduced costs of businesses and increased the disposable income of low-income groups, but it seems that not even the right-wing Anastasiades government is prepared to take such a daring step and challenge the socialist economic thinking of the parties.
The truth is that nobody in the political establishment is prepared to challenge the discredited and failed way of running the economy, in which the big, interventionist state is the main agent of growth and development. Meanwhile business and free enterprise – the real agents of growth – will continue to be stifled by heavy taxation, bureaucracy and high interest rates. Opposition parties are correct in doubting Georgiades’ recovery claims for 2015, but for the wrong reasons.