Government’s Poor Response to Cost of Living Crisis Poses Poverty Risks

According to the latest Eurobarometer of the European Commission seven out of ten Cypriots describe the economic situation of Cyprus as bad with a majority of Cypriots being very concerned about the damaging effects of soaring prices and costs on their standard of living. Yet a chart published by the Financial Times indicates that between September 2021 and August 2022 the Cyprus government only allocated a lowly 0.7% of GDP “to shield households and businesses from rising prices”, whereas countries like Italy and Greece earmarked more than 2.8% of their GDP for providing such assistance.

The Cyprus Government with its 4.6 billion euro (20% of GDP) in reserves or deposits at banks and greater VAT revenue because of rapid inflation does not seem to care about helping the many households and small businesses struggling with very large increases in their costs of living and operations. While the Minister of Finance, Constantinos Petrides, has promised to allocate 50 million euro (0.2% of GDP) for absorbing a large part of the increase in energy costs in the coming months, the Government appears to be intent mainly on spending money for political purposes such as boosting the number of loyal employees on its payroll, outlaying funds on unnecessary defense and security, and subsidizing property developers and hoteliers with prime focus on gaining support for the ruling party’s candidate in the Presidential elections.

Furthermore, employers in the private sector such as supermarkets, hoteliers, and petroleum companies, that have protected their businesses against inflated costs with large increases in their prices, have been unwilling to compensate employees with adequate rises in their wages. In fact, consumer prices increased by 7.8% in the first half of 2022 compared with the same half of 2021, while on the basis of Eurostat figures it is estimated that wages of private sector employees, excluding those in banks, increased by only around 3%. Thus, the real incomes of these private employees fell sharply in first six months of 2022 and are likely to continue to decline in the second half of this year.

Poverty risks

Estimates for recent years indicate that fewer Cyprus households progressively had a risk of descending into poverty, although in 2021 17.3% of households still encountered the risk of experiencing poverty. But with the very large decrease in real household incomes during 2022 many more households are and will face the risk of poverty this year. Indeed, the 2021 estimates show that Cyprus households with the lowest 20% of incomes (first quintile) had a 73.6% poverty risk whereas the second quintile of households had only a 6.4% poverty risk. Surely, the steep fall in real household incomes of low middle income households, particularly those renting, will significantly raise their grim prospects of being confronted with the greater risk of poverty this year. And with energy prices continuing at very high levels lower income households will be driven into energy poverty in the absence of substantial assistance from the government. In truth, as stated by numerous commentators many European households this winter will face a choice between eating and heating.

As a result of rampant inflation businesses are being adversely affected by the higher costs of their operations as well as by reduced demand for their products owing to lower real household incomes. In addition, rising interest rates and difficulties in obtaining bridging finance to weather downturns in activity could further curtail business and in turn lead to increased unemployment and falling incomes. Indeed, the prospect of a recession in Cyprus featuring a steep increase in household poverty and a substantial widening of income and wealth inequalities is a distinct possibility.

Policy Measures

As indicated above Cyprus has performed poorly relative to many other European countries in providing assistance to households and businesses in protect them from the damaging effects of soaring prices and costs. In rendering assistance to struggling households European governments have focused primarily on lowering energy costs for households following the advice of the European Commission, stating that “the immediate priority should be to mitigate social impacts and protect vulnerable households, ensuring that energy poverty is not aggravated”. In Cyprus despite considerable funds being available, the government has only provided modest discounts on electricity bills and extended subsidies for energy bills for residents in mountain areas with such assistance just covering a small part of the increase in energy costs for vulnerable individuals and families, and less so for most households. In contrast, from last September Greece has provided subsidies and other measures to absorb up to 90 % of the rise in monthly electricity and gas bills for households.

Moreover, the Cyprus government needs to adhere strictly to its stated objective of providing public assistance namely “to safeguard every individual’s right to a decent standard of living” including giving financial assistance and other support to the elderly and the disabled and other vulnerable individuals and families. And to ensure that application forms for significantly increased financial assistance to vulnerable individuals and families are quickly processed immediate efforts must be made to greatly improve administration capacity and efficiency in the Social Services department.

Many employers in the private sector have been able to protect their businesses from rising inflation by raising prices for their products. Surely, these employers should show fairness in simultaneously helping to shield employees from soaring prices by raising their wages, including introducing officially decreed minimum wages where relevant. Most strikingly, while consumer prices increased by 7.8 % in the first half of 2022, wages in the industrial and construction sectors rose at rates of only 2 to 3%.

 Other businesses, however, will require government assistance to offset their rising costs. Most farmers would need to have the elevated costs of feed grain and fertilizer inputs subsidized. And businesses which are intensive users of electricity and gas such as producers of building materials like cement should have their energy bills considerably subsidized or discounted.

Inequalities

The impact and reactions to the COVID-19 virus and to the ongoing surge in prices and costs have not only exposed inequalities in Cyprus, but have exacerbated them. Although aggregated data show that income inequality and the risk of poverty and social exclusion have not deteriorated in recent years particular inequalities such as the large gaps between the compensation of public sector and private sector employees and between the disposable incomes of the older generation of property owners and the younger generation of rentiers have been widened. Indeed, if account is taken of housing costs in disposable income calculations it is the younger persons working in the private sector and renting accommodation[1] who are suffering the most from these inequalities. Without substantial help from their parents a majority of the young can’t afford to purchase a house, raise a family, and enjoy a decent standard of living.

 Most importantly, in addition to the financial assistance required to help the young and the disadvantaged there is a need to create decent job opportunities in the private sector and to provide training and re-education for low-income employees to secure better employment. Furthermore, rather than building an excessive number of luxury apartments through the government recklessly issuing a multitude of building permits to favored developers, the government should be promoting the construction of affordable housing. In this connection the Recovery and Resilience plan agreed with the EU should be modified and implemented to reflect these needs.

Financing

Greater revenue from VATs, excise duties and the CETS together with reserves of around 4.6 billion euro should enable the government to finance substantial increases in targeted financial assistance to households and subsidies and other measures for farmers and small businesses. In the event of high energy prices being sustained the taxes on products such as electricity, petroleum, diesel oil and bottled gas will need to be reduced in order to help mitigate the impact of elevated energy costs on households and businesses in general.

The needs to boost government revenue from tax sources other than energy and to narrow income and wealth inequalities call for a fundamental reform of the tax system and its administration. As repeatedly recommended a high-yielding and progressive property tax should be introduced so as to decrease wealth inequalities. Also, the personal income tax system should be made more progressive by raising the top marginal rate to 40% for annual incomes above 75.000 euro. And the deliberately grossly inefficient tax administration in Cyprus needs to be overhauled so as to combat prolific tax evasion, practiced disproportionately by professionals such as accountants, lawyers, and doctors and as well by real estate agents and property developers, in order to substantially raise revenue and reduce income inequalities.