CYPRUS must urgently trim widening public sector deficits to safeguard a nascent economic recovery and avert more dramatic cost cutting which could slash salaries and pensions, Central Bank governor Athanasios Orphanides said yesterday.
He said government estimates of a 6.0 per cent deficit in 2010 – twice the ceiling recommended by the European Union – could prove to be overly optimistic, and it could hit seven per cent of GDP next year – well above a target set by Brussels.
Orphanides, a Governing Council member of the European Central Bank, said delays in cutting spending would amplify the impact of any fiscal consolidation package, and said it could hit pensions and the state payroll.
He also said a taxation option – one of several mulled by authorities to wrestle down a deficit seen hitting 6.0 per cent this year, was not a solution.
“The passage of time will make any required measures more painful. As the deficit widens, so do solutions which require a higher cost,” Orphanides told parliament’s finance committee.
“If at this point a freeze in pay rises is required, any further delay could potentially require significant cuts in salaries and pensions, as was the case of Greece, Ireland, Portugal and Spain,” he said.
Orphanides said state spending had outstripped growth, rising 10 percentage points annually from 2008. Cyprus, the euro zone’s second smallest member, employs some 55,000 civil servants for a population of around 800,000. Its payroll represents 30 per cent of overall spending.
“If there is no change in policy, spending will exceed 50 per cent of GDP in coming years. There is nothing comparable anywhere in the euro zone,” Orphanides said.
Although fiscal measures have been debated for almost a year, there has been little by way of implementation.
The finance ministry has said it is considering increases in value added tax, now 15 per cent, a corporate tax increase and possibly taxing banks.
It says it wants a consensus from political parties on how to move forward, an unlikely task because of the parliamentary elections next May.
Corrective measures focussed on tax which could possibly stifle investment, and cutting development spending which could create jobs was not the answer, Orphanides said.
“No matter how much tax revenues increase, it is impossible for that to cover the increases in spending,” he said.
Brussels began an excessive deficit procedure – legal action which can eventually lead to sanctions – earlier this year, requiring Cyprus to incrementally reduce its deficit from the official estimate of “close to” 6.0 per cent in 2010 to 5.4 per cent in 2011.
While Orphanides said Cyprus was showing signs of economic recovery after its first recession in more than 30 years, he said wide deficits and growing unemployment were underlying risks to economic health.
He did not give new growth forecast figures, but cited IMF estimates that the economy would grow 0.4 per cent this year, and 1.8 per cent in 2011.
Orphanides said that Cyprus may not be returning to the high rates of growth it was accustomed to in the past, making the problem of unemployment more challenging.
