ONE OF the discoveries made by President Papadopoulos soon after assuming his responsibilities was that public finances were in a bigger mess than the previous government had been letting on. The economic forecasts made by his predecessors were over-optimistic and the harsh reality was quite different. The war in Iraq, which adversely affected tourist arrivals, contributed to the mistaken forecasts — state revenue was significantly lower and, consequently, the fiscal deficit higher than was originally expected.
The new government blamed its predecessor’s bad economic management for the poor finances but also recognised that it had the responsibility of putting things in order. Papadopoulos, concerned about the state of public finances – a fiscal deficit of 5.4 per cent of GDP in 2003 — gave instructions to government departments telling them to control spending and on no account to exceed their budgets. Meanwhile government officials were told to avoid foreign travel, unless it was absolutely necessary – Cyprus did not have to be represented at all meetings of EU committees he told them. The government also made redundant a couple of dozen press attaches working at its embassies.
This cost-saving was little more than a drop in the ocean as was the finance minister’s much advertised reduction of each ministry’s budget for 2004. However, the government did declare a war on tax evasion, hoping to reduce its deficit by making tax collection more efficient and thus increasing its revenue. The policy was proving quite successful, it was reported yesterday. For the first 11 months of 2003, tax revenue was up by seven per cent on the corresponding period of the previous year, with a record £484 million collected.
This is commendable but, on its own, is unlikely to reduce the fiscal deficit to an acceptable level because the public sector wage bill grows at an average annual rate of about 15 per cent. Economists who have done the exercise argue that no matter how efficient tax collection becomes, it would never catch up. As for any business, when expenditure is growing at a faster rate than income, books would never be balanced. The obvious solution, which the government obstinately refuses to see, is the reduction of the public sector wage bill (the main cause for the widening fiscal deficit), which can be achieved through reductions in worker numbers, a three-year freeze in pay rises or a combination of both.
There is no other way. This was mentioned, indirectly by an IMF executive director who was recently in Cyprus. Jeroen Kremers warned that Cyprus must reduce its fiscal deficit and keep it at a low level before entertaining any thoughts of joining the eurozone. Kremers said in an interview with the Cyprus News Agency: “The most important thing is to embark on a strategy, a policy that is convincing that the deficit will go down in not too many years and that subsequently it will stay down; that is the challenge.”
Clamping down on tax evasion is a start, but the strategy will be neither effective nor convincing if it does not include a plan to gradually reduce the cost of the public service, the biggest drain on the country’s resources.
