Self-serving Cyprus budgets yet again

The Cyprus government’s budgets for 2025 to 2027 presented to the House of Representatives in October 2024 constitute business as usual with just a mechanical updating of the government finance estimates for 2024.

In truth, no significant policy changes are incorporated in these budgets. As in recent years, the prime goal of the government in its fiscal policies for 2025 is to generate a sizable budget surplus, irrespective of the costs it inflicts upon most citizens and the natural environment. 

In its budgets the government aims essentially at serving itself with generous budgetary expenditures and taxation policies that are directed at benefitting politicians and the vast army of government employees and advisors as well as their wealthy collaborators including property developers, lawyers, accountants and bankers.

And despite such selfish policies the government can still produce surpluses geared to obtain upgrades from credit rating agencies by budgeting and disbursing pitiful amounts for social needs and essential investments, including the green transition, as well as by imposing increasingly regressive taxation on its citizens.

In essence, the budget policies of the government indicate that it is far from exercising sufficient responsibility toward the welfare of its citizens and the health of the natural environment.

Indeed, the statement of the Minister of Finance, Makis Keravnos, that “It is a surplus budget, which will contribute to maintain the economy on a sustainable development path, but also in parallel targeting the social policy of the state” would seem to be sheer fantasy.

Unless there are significant changes to the 2025 budget only a sizable budget surplus would be achieved. Economic development would continue to be derailed with the delayed and deficient implementation of investment projects, while social needs, despite recent measures, would remain underfunded with deserving beneficiaries inadequately targeted.

MPs’ scrutiny of budgets

MPs in scrutinising government budgets should focus on the big picture of a government obsessed with generating sizable budget surpluses, and neglecting to focus on how expenditure and taxation policies can be used to support the economic and social well-being of its citizens as well as combatting climate change.

MPs should not just take a “sliced salami” approach in calling for cuts in particular budget expenditure items at a time when the government has piled-up huge deposits or reserves at banks amounting to €5.5 billion at end-August 2024.  

Notably, in 2023 Cyprus was one of only three euro area countries that produced a government surplus, in fact, the highest in the eurozone at 3.3 per cent of GDP. The rest of the euro area members recorded government deficits as most spent more funds aiming at alleviating cost of living pressures on their citizens and in supporting social needs. 

In contrast to Cyprus with its targeted budget surplus of 3.3 per cent of GDP for 2025, the large majority of euro area countries are planning sizable deficits in their government budgets for 2025, with France aiming to reduce the deficit to 5 per cent of GDP and Italy planning to contain the deficit at 3 per cent of GDP.

MPs in their analysis and call for changes in the 2025 budget need to realise that surpluses take money out of the economy and diminish the purchasing power of its citizens.

It is estimated that the targeted budget surplus of 3.3 per cent of GDP would reduce spending power by over one billion euro, that is, funds which could be used to raise spending on development projects and social protection, as well as supporting investments and measures to combat climate change.

While MPs need to recommend the increased funding of capital projects, they should give consideration to the severely festering problem that the effective implementation of key public investment projects is being seriously hampered by the lack of capacity and corruption in the arrangement and execution of such projects. Indeed, in the first 9 months of 2024 development expenditures amounted to only 37 per cent of the funds budgeted for the year.

This problem can’t be remedied with short-term fixes such as hiring more competent persons in the government and for decision-making in the award of projects by the Tenders Review Authority.  Profound institutional changes are required including the setting-up of an independent development-type agency as repeatedly proposed by economist Savvakis Savvides and this author that would employ technical experts tasked with appraising and financing large-scale investment projects.

While the wage and salary bill for the bloated army of public sector employees and advisors, which is estimated to rise to €4 billion in 2025, needs to be contained, the government should be allocating more funds for creating decent jobs in the private sector, including subsidising outlays for R&D and capital ventures by young persons.

And more government expenditure should be invested in vocational education and training for youth and adults so that labour shortages in certain trades can be met with well-paid jobs.

While the government announced “new support measures” on October 30, 2024 including staggered electricity subsidies and the validation of zero VAT on specific products and has earlier budgeted a rise in social protection expenditures of over 5 per cent in 2025, such government expenditures would still be quite low by European standards.

Additionally, lowly-paid pensioners in Cyprus with average disposable incomes of less than €1,000 per month comprise nearly 10 per cent of the population. Not only should the government target these pensioners by providing them with more adequate levels of income, but other vulnerable persons including the unemployed should be the recipients of much higher social benefits so at least they can cope better with cost-of-living pressures.

The increasingly regressive taxation policies pursued by the Cyprus authorities may be providing ample revenue to finance budget expenditures, but are also adversely affecting the personal economies of most citizens.

Indeed, inflation has enabled the government to rely increasingly on regressive taxes such as the VAT and excises for its revenue, while at the same time it has dragged lower and middle-income earners into higher tax brackets.

In truth, tax reform at a minimum should raise the personal income tax rate thresholds that have not been adjusted since 2006. For instance, the tax-free threshold for annual personal incomes currently at €19,500 could be raised to €23,500 to take account of the impact of inflation on incomes over the last 18 years.

The government is committed under the Recovery and Resilience plan with the EU to “green taxation reform” in order to address environmental and climate challenges.

However, the budget estimates and statements by the Cyprus authorities indicate that there would be considerable delays in introducing the carbon tax for fuels used in non-ETS (EU Emission Trading Scheme) sectors such as transport (excluding aviation), services, housing,and agriculture.

Delays are expected also in placing a levy on water to encourage conservation, in introducing a charge on landfill waste and in levying a nightly tourism tax.

The bottom line is that MPs need to be constructively critical of the budget for 2025, which continues to place the interests of the government in its relations with credit rating agencies, politicians, civil servants and business collaborators above those of supporting ordinary citizens and protecting the environment with its expenditure and taxation policies.

Why should Cyprus continue to target large surpluses when it has huge amounts of reserves and when far from sufficient funds are being allocated for the effective implementation of key investment projects, for supporting workers and entrepreneurs in the private sector and for social needs?

And MPs need to be critical of the continued failure and delays in using taxation policies and their administration to reduce income and wealth inequalities, to combat corruption and tax evasion and avoidance, and to protect the environment.

In truth, MPs need to raise the question of the timing of the government’s promised tax reform.

Les Manison is a former senior economist at the International Monetary Fund, an ex-advisor in the Cyprus finance ministry and a former senior advisor at the Central Bank of Cyprus