Cyprus Government Imposing Austerity and Piling-up Cash: Could Do More to Support Economy and Citizens

Austerity policies practiced by the Cyprus government over the last two years has contributed to mounting fiscal surpluses and boosted substantially its cash balances. But, this unnecessary fiscal austerity together with the continued inefficient, and even often corrupt, allocation of government resources is diminishing its ability to support economic development and the welfare of its citizens.

Government policies

The Cyprus government with its generation of mounting surpluses and running down of its debt just seems to be trying to impress credit rating agencies and dogmatic international institutions[1] rather than using its financial resources efficiently to support the real economy and improve the lives of its citizens. Indeed, the government is constraining certain priority expenditures just to produce surpluses.

 Does the Minister of Finance understand that taking money out of the economy with rising fiscal surpluses at a time when households and small businesses need funds to offset the higher costs of living and operations is seriously hurting production and incomes in the private sector?  

In truth, apart from being generous with certain building contractors and in the payment of salaries to its expanding army of well-compensated employees and advisors, the government is pursuing a policy of austerity. Quite strikingly, Cyprus government expenditure as a share of GDP was 40.2% in 2023 compared with an average for the euro area of 50.0%. This is a troubling and irresponsible difference, and reflects the failure of the Cyprus Government to spend adequately on the provision of social security and the green and digital transitions, given its obsession with achieving a fiscal surplus and rapidly reducing its debt. Indeed, the fiscal surplus of Cyprus was equal to 3.1% of GDP in 2023, whereas the average deficit of more citizen-oriented other euro area members was 3.7% of GDP.

Such austerity that is being misleadingly labelled as fiscal prudence and discipline by, among others, President Christodoulides and House Leader, Anita Demetriou, is reflected glaringly in meanness in the allocation of funds in assisting vulnerable persons suffering from cost-of-living problems. Indeed, in the latest government package of measures aimed at helping suffering households and businesses with electricity subsidies and social assistance to vulnerable families, comprises an allocation of only 35 million euro at a time when by end-February 2024 the government had accumulated cash deposits of over 3.5 billion euro at the Central Bank and 2.1 billion euro at commercial banks.

And the government is piling-up revenue and cash by over-taxing households and businesses via the effects of inflation. With personal income tax rates unchanged, incredibly since 2011, the impact of inflation on wages and salaries has dragged persons into higher tax brackets, and substantially reduced their real disposable incomes in the process. Furthermore, government revenues have benefitted substantially from the higher prices of goods and services boosting VAT receipts, which in 2023 rose by over 10% compared with 2022.

Furthermore, the government is failing to undertake investments and measures aimed at reducing carbon emissions in line with the European Climate Law, but instead continues to promote the excessive construction of apartments and commercial offices with the generous issue of building permits and the failure to penalize property developers for their numerous violations of environmental regulations.  Such policies and the lack thereof not only damage the natural environment, but ordinary citizens are burdened with higher taxes because of the failure of the government to meet commitments on reducing carbon emissions as well as being confronted with unaffordable housing costs.

Dealing with Challenges

A key challenge for both the Cyprus government as well that of banks is to allocate their resources more efficiently, and not just pile-up cash[2], so as to support the real economy and serve its citizens much better.

While the government should cut-back its bloated wage and salary bill for employees and advisors, well-targeted expenditures on social benefits and for the care economy as well as for projects to bring about the green and digital transitions under the Recovery and Resilience plan agreed with the EU need to be increased substantially.

But, to greatly facilitate the reallocation of government resources the systemic corruption and tax evasion plaguing Cyprus needs to be ironed-out. In this connection, there is an overwhelming need to eradicate the graft associated with the frequent award of large-scale infrastructure projects to contractors including those under Public Private Partnerships; in fact, these awards take place usually without any decent studies of the economic viability and potential damaging effects on the environment of such projects. And the Cyprus authorities should fundamentally reduce the extreme tolerance of tax evasion and debt defaulting they give to big companies that enables them, such as developers over-supplying the property market with their wasteful use of resources, to continue to operate.

In addition to reducing fiscal surpluses, government funds for financing the greater spending on priority projects and programs can be boosted significantly by combatting tax evasion, the re-introduction of a central government progressive tax on immovable property, and adjustments in the progressivity of antiquated personal income tax rates including, importantly, the tax-free threshold, for inflation.

And if Cyprus banks are making large profits from activities, such as from interest income on their large cash deposits at the ECB, that are not contributing to supporting the real domestic economy, a part of these profits should be taxed at a higher rate and in effect returned to the Cyprus public.

In addition, given that the Cyprus government and bankers continue to show a limited interest and a lack of competence in seeking and appraising worthwhile infrastructure projects to finance, serious consideration should be given to setting-up an independent Development Bank, that would be tasked with evaluating and financing large-scale investments, as advocated in previous opinion pieces.

Conclusion

The bottom line is that is that the management of the economy of any country should be directed at bettering the lives of its citizens. Unfortunately, top Cyprus officials and politicians judge the performance of the government in managing the economy mainly and irresponsibly by measurements of real GDP growth and data on fiscal balances and public debt. Hardly, any consideration is given to whether the bulk of citizens are sharing in the benefits of GDP growth and whether the implementation of government expenditure and taxation policies are really helping ordinary citizens and the vulnerable or are just benefitting the political and business favorites and the expanding army of well-compensated public servants and advisors.