Government Budgets Continue to Serve the Few and Neglect the Many

Government budgets are the main instrument of economic policy that decide how resources are to be allocated and collected from various interest groups. On Wednesday, MPs voted to approve the Cyprus government budgets for 2025, 2026 and 2027. Despite a multitude of amendments, MPs as usual, approved budgets that are directed at producing large government surpluses, continued and increasing huge outlays on government personnel, but keeping development and social expenditures at pitifully low levels. Indeed, contrary to the questionable statements of Minister of Finance, Makis Keravnos, that MPs exercised a “responsible stance” in approving the budget, and “focuses on development and reflects the needs of society”, the budget is grossly inadequate and irresponsible towards the needs of society and in failing to support real economic development and protection of the natural environment.

Budget for 2025

More specifically, the government aims NEEDLESSLY at producing a very large budget SURPLUS of over 1.1 billion euro or 3.3% of GDP in 2025. The government has stabilized its finances and has no need to generate a planned primary surplus of 4.8% of GDP in order to further substantially reduce its debt. Moreover, why should the government be taking much money out of the economy with surpluses at a time when households and businesses are suffering from severe cost pressures. In marked contrast to Cyprus, most EU countries plan government deficits in their budgets for 2025 in order to inject money into their economies[1].

Quite strikingly, expenditure on compensation of government employees and advisors is slated to rise by 5.5% to 3.0 billion euro in 2025 and account for over 27% of total government spending, after increasing by an estimated staggering 29.6% in the two years of the Christodoulides Presidency. And while personnel expenditures are deemed extremely excessive and should be scaled back there is the perennial issue of whether outlays on government employees and advisors can be restrained to budget “limits” in view of their large cost overruns in recent years.

In sharp contrast proposed development expenditures for 2025 amount to I.5 billion euro, a mere increase of 4% above their low and over-estimated level in 2024. And even this depressed level of development expenditures for 2025 is sheer fantasy as in line with previous years less than two-thirds of planned capital expenditures can be expected to be implemented.

And it is in the execution of development projects aimed at effecting the green transition including waste management and renewable energy investments and management where significant shortfalls in implementation have been most pronounced and tainted with corruption. In truth, such shortfalls combined with excessive property development and a rapidly expanding motor car economy are contributing to the profound degrading of the natural environment.   

While expenditure on social transfers is budgeted to increase by around 5% in 2025 and despite recent populist measures to raise certain benefits such as extending the time of maternity leave, social expenditures are being kept abysmally low. In fact, social protection expenditure by the Cyprus government amounted to just 11.8 % of GDP in 2022, well below the average in the euro area of 20.1%. And pensions in Cyprus are around two-thirds of the average level in EU countries.

Furthermore, given the mounting hardships of vulnerable persons such as single mothers and the rising number of homeless people the level of social protection provided by the government is proving to be increasingly inadequate.

Impact on lower-and middle-income earners

Most importantly, there is the issue of how budget expenditures and the tax system are affecting the lives of ordinary citizens most of which are persons earning low and middle incomes working in the private sector, that in turn are struggling with harsh cost of living pressures. Do the proposed budget expenditures and taxes for 2025 provide any additional assistance to these persons and their households? Apart from some piecemeal populist social measures the answer on the expenditure side is no.

 Moreover, the increasingly regressively tax system of Cyprus and the failure to implement commitments made to the EU are disproportionately hurting low-and middle-income households. These households as well as businesses have recently been most adversely affected by the impact of inflation on the payment of VAT and excises.  Yet, unfortunately, the 2025 budget has direct taxes rising by 4.9% to 3.92 billion euro, while indirect taxes are projected to reach 4.56 billion euro, a rise of 5.6%.

Furthermore, personal income tax rates have been kept unchanged since 2008 even though inflation has brought middle income earners into higher tax brackets. And the Cyprus taxpayer is being burdened with paying fines to the EU because of the government’s failure to institute agreed reforms such as raising the corporate tax rate from 12% to a 15% minimum on the profits of multinational companies with annual revenues exceeding 750 million euros.

Furthermore, there is no indication in the personal income tax estimates for 2025 and beyond in the budgets that the government is truly serious about combatting tax evasion as promised by President Christodoulides. It is a scandal that the personal income tax receipts of the self-employed, that are the main culprits in evading taxes, are projected to remain unchanged in 2025 at the same estimated low level of 80.5 million euro in 2024, and rise only modestly to 84.0 million euro by 2027. In stark contrast, personal income tax receipts from employees are projected to increase from an estimated 1.0 billion euro in 2024 to 1.1 billion euro in 2025 and reach a much higher 1.25 billion euro in 2027.

Recommendations

In common with their vote rejecting the extraordinary tax on bank profits MPs have shown their hand by approving the 2025 budget, that once again lavishly and stealthily benefits the few at the expense of the many. And certain MPs that have advocated government support for the suffering middle class shamelessly approved the government budgets.

Indeed, the Cyprus government with their large surpluses and banks with their huge profits are building-up and hoarding large amounts of cash or funds[2], which should be used to adequately assist pensioners, vulnerable persons and other deserving beneficiaries as well as productively financing soft and hard infrastructure investments including facilities for the care economy.

 While the contents of approved Cyprus government budgets have been detrimental to society and the real development of the economy, it is their very poor actual implementation, often reflecting corrupt management, that has worsened matters. In this respect, MPs must pay more than lip service to their statements that “we will monitor the budget’s implementation closely” and “require Ministries to inform Parliament every six months about the Interconnector electricity project and expenditures on the Home and Rent-to Installment projects and the 170 million euro of appropriations for housing projects”. And MPs, also, must press the government to raise its institutional capacity.

Much action will be required to substantially improve the implementation of government budgets including the needs in particular to restrain personnel expenditures, to effect the timely and sound execution of development projects, and to better and adequately target persons deserving of social assistance.

 Although the government can enhance its institutional capacity through the digital transition and the employment of competent staff, MPs need to give serious consideration to recommending the setting-up of an independent development-type agency employing experts that would be tasked with the evaluation, arrangement and financing of large-scale public investment projects so as to ensure their economic viability, effective execution, and minimal burden on the government finances.

And there is the urgent need for MPs to elicit a firm promise from the Government to reform the antiquated tax system during 2025, making it much less regressive through reducing reliance on indirect taxation and increasing the progressivity of income tax rates as well as giving consideration to introducing central government taxes on immovable property.

Furthermore, MPs should stop turning a blind eye to the inefficient and corrupt tax administration system prevailing in Cyprus and call for initiating its overhaul with urgent priority assigned to undertaking really serious efforts to combat the prolific tax evasion that plagues the country.

[1] Magnitudes of budgeted DEFICITS for2025 for particular EU countries range from over 5% of GDP in France through 3.5% in Italy and Malta, to 2.5% in Spain, and further to 0.5% in Germany and 0.1% in Portugal. 

[2] Government deposits or reserves at banks amounted to over 6.1 billion euro at end-October 2024, while cash and cash balances at Central Banks of Cyprus banks totaled an estimated 20.5 billion euro at end-September 2024.