Government Budgets Should Serve the People and Not the Few

Government budgets are the main instrument of economic policy that decide how resources are to be allocated and collected from various interest groups. And this Wednesday, MPs will deliberate on whether to approve the Cyprus government budgets for 2025, 2026 and 2027 presented to the House of Representatives by the Minister of Finance. Will the MPs as usual approve budgets that are directed mainly to satisfying the bloating army of government employees and advisors and the financial interests of business collaborators including favored contractors, while keeping development and social protection expenditures at low levels in order to produce NEEDLESS, sizable budget surpluses?

Inequitable Budget for 2025

The government aims to produce a budget surplus of over 3% of GDP in 2025. Expenditure on personnel, which is projected to account for around 30 % of total government spending, is budgeted to increase by over 5% to 4.3 billion euro in 2025 after increasing by an estimated whopping 12.6 % in 2024. And while personnel expenditures are deemed excessive and should be scaled back there is the perennial issue of whether outlays on government employees and advisors can be restrained in view of their large cost overruns in recent years.

In marked contrast proposed development expenditures for 2025 amount to I.5 billion euro, a mere increase of 4.4 % above their over-estimated level in 2024. And even this low level of development expenditures for 2025 is a 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 projects 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 serious degrading of the natural environment.   

While expenditure on social transfers is budgeted to increase by 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. 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-third of the average level in EU countries.

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, which are struggling with mounting cost of living pressures. Do the proposed budget and taxes for 2025 provide any additional assistance to these persons and their households? Apart from some piecemeal populist social transfers 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. Indeed, it is the view of many citizens that their higher VAT payments (rise of 7.6 % in the first 10 months of 2024) finances the increases in the compensation of government employees (same 7.6 % rise over this period). 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 lumbered 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 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 among the most prolific of tax evaders, are projected to remain unchanged in 2025 at the same estimated low level of 80.5 million euro in 2024, and only rise modestly to 84.0 million euro by 2027. In a striking contrast personal income tax receipts from employees are projected to increase from an estimated 1.0 billion in 2024 to 1.1 billion euro in 2025 and reach a much higher 1.25 billion euro in 2027.

Advice to MPs

From a macroeconomic perspective the government has stability in its finances and has no need to achieve a budget surplus of over 3% of GDP in 2024. The size of the surplus should be reduced to a maximum of 1.0% of GDP and priority given to raising significantly budgeted development and social expenditures so as to produce a sustained improvement in the personal economies of the citizens of Cyprus. And unless the government agrees to such changes in the budget for 2025 MPs should not approve the budget.

MPs should stress that performance in actually implementing the budget in 2025 must be fundamentally improved, particularly in restraining personnel expenditures, in effecting the timely implementation of development projects, and in the better targeting of persons deserving social assistance. While the government can improve 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.

In addition, MPs should elicit a firm promise 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 wealth, especially immovable property.

Furthermore, MPs should stress that the inefficient and corrupt tax administration system in Cyprus be overhauled with serious efforts embarked upon to combat the prolific tax evasion that plagues the country.