Cyprus: Cost of Living Crisis and Need for Substantial Government Assistance

The cost of living crisis afflicting households and businesses in Cyprus and most other countries is deepening as the gap between soaring prices and input costs on the one hand and incomes on the other hand widens. In Cyprus reflecting surging energy and grain product prices, the consumer price index rose by 8.6% over the 12 months to April 2022. The increases in average incomes of government and especially private sector (excluding financial sector) employees have lagged far behind resulting increasingly in diminishing real purchasing power. Most strikingly, inflation is hitting low-income households hardest as they struggle to afford even essentials such as petroleum, electricity and basic foods, the prices of which have become disproportionately higher. Indeed, given that poorer households spend more of their income on food and energy products than the weights of these items in the consumer price index it is estimated that they are experiencing currently rates of inflation of over 10%.

And with a great number of households suffering from the steep increase in the cost of living many will descend into poverty in the absence of measures to reduce inflationary pressures and the receipt of substantial assistance from the government. Furthermore, many businesses and their employees will suffer if they can’t pass on sharply rising input costs into higher prices.

Government Scope to Cap Price Increases Limited?

It is argued that in a market economy governments have limited scope for mitigating price increases. It is further contended that all they can do is to try to ensure that prices and profit margins are not raised excessively through monitoring competition between producers as well as adjusting taxes on certain key products such as electricity. But the French example whereby the government capped the increase in energy prices at 4% until end-June 2022 and where consumer prices rose by a relatively low 5.4% (EU average 7.4%) over the last year by not allowing the passing on of high wholesale energy prices to the consumer and forcing the monopolistic French energy company EDF to make less profits provides, at least over the short-term, makes foran effective case of price capping.

In Cyprus there is the question of whether the Commission for the Protection of Competition is effectively monitoring competition between producers so as to prevent collusion between businesses such as milk producers and bakeries in the fixing of prices.  The Commission as well as the Ministry of Commerce should be investigating whether oligopolistic middlemen such as certain importers and wholesalers are exacting excessive profits with unjustified price increases

Cyprus Relying on Reducing Energy Prices, but Extending little Direct Financial Assistance

Most Governments in Europe have resorted mainly to reducing taxes on energy products in efforts to reduce the rate of inflation and its adverse impact on households and businesses. Cyprus has reduced the VAT on discounted electricity bills from 19% to 10% for households and businesses and to 5% for vulnerable persons until June 2022 and has subsidized households in mountainous areas of up to 50% of their energy bills.

But increases in Cyprus government assistance to vulnerable groups including low-income households so far in 2022 to help protect their living standards has been minimal and much less than in a number of EU countries. The government has presented a 102 million euro supplementary budget to the House of Representatives including only 30 million euro (0.13% of GDP) to deal with the fall-out from the war in Ukraine that entails 18 million euro for the “management, storage and purchase of wheat and corn reserves” and 8 million euro in “financial assistance to farmers, necessary due to the soaring prices of animal feed”. However, direct financial assistance to vulnerable groups including low-income households relying on private sector wages to cope with higher living costs has not been forthcoming.

In sharp contrast, the German government for instance this year has provided a 200 euro boost for people on benefits, as well as a 100 euro topping up of child support, and at least 270 euro for people on housing assistance. A low-income family with two children could receive at least 657 euro, plus a possible heating subsidy of 490 euro. Also, in Germany the government has proposed that parliament enact the minimum wage as law and increase it from 9.82 euro per hour to 12.00 euro per hour by October 2022 as well as setting a floor for wages per hour for part-time and marginal employees affecting 6.2 million workers.

And in France 5.8 million households with monthly incomes of less than 2,000 euro received a one-off 100 euro grant to cover their energy bills on top of an annual energy voucher of 150 euro.

What should be done in Cyprus?

In Cyprus a substantial increase in direct financial assistance needs to be given by the government to vulnerable groups including those families and pensioners receiving social benefits. Full COLA should be provided to eligible employees (mainly those in the financial and government sectors) for those earning under 2,000 euro per month. But most workers in the private sector are not eligible for COLA and arrangements need to be made by employers to increase the remuneration of their staff. While supermarkets and many employers in the healthcare and hospitality sectors have the capacity to boost wages of their employees as a result of being able to pass on higher costs into increased prices, employers in many sectors and the informal economy would not appear to have the financial capacity to compensate their employees with increased incomes.  For example, contractors in the construction sector where material costs have risen by a spectacular 24.6% over the year to April 2022 would seem to have little ability to raise wages of their employees.

Thus, low-income households not receiving social benefits and not being compensated for increases in the cost of living with higher wages would be particularly vulnerable for descending into acute poverty. Despite the mounting financial problems of many employers there is a pressing need to enact a law providing for and generalizing a minimum wage so as to put a floor under the compensation of low-income workers. In addition, there is a need to bring more families into the formal institutional arrangements so as to receive government social benefits and hopefully be eligible for minimum wages enhanced by COLA., in order to try to maintain their living standards.

Government Resources Need to be Raised

 Minister of Finance Constantinos Petrides has argued that the government does not have the reserves to finance substantial assistance to households and businesses to deal with the cost of living crisis. But the latest figures show the government generating surpluses and having deposits at the Central Bank of 4.4 billion euro and 1.2 billion euro at commercial banks. Presently, these reserves should be used in most part for protecting vulnerable households against the impact of surging inflation rather than being “reserved” for political purposes.

However, eventually such reserves are likely to be depleted and the government should add to its resources by instituting badly-needed reforms of the tax system and its administration to bring about a substantial redistribution of income and wealth. It would be only fair that those persons and companies, which have the greater ability to pay taxes, provide the funding for government spending in extending increased financial assistance to vulnerable groups and in making up for shortfalls arising from tax reductions to curb increases in energy prices.

Conclusion

It can be concluded that the Cyprus government is doing much too little in protecting its population from the damaging effects of inflation by failing in particular in extending sufficient direct financial assistance to vulnerable groups, including low-income earners to help them cope with the sharp rises in the cost of living.