Cyprus: Government Policies Benefitting the Few and Neglecting the Many

Under the current Cyprus government its policies are increasingly serving the interests of the very few rather than the needs of the many. This is particularly the case in the management of the economy and in protecting the environment where the government is just using its abundant financial resources from taxpayer’s money and costly borrowing to most generously allocate funds for its rapidly increasing army of well-paid employees and advisors as well as lavishly extending public funds to favored contractors and consultants. And public investment expenditure is largely being limited to expanding infrastructure to support the flourishing motor car and tourism economies of Cyprus, that in turn are damaging the physical environment.

In sharp contrast, with investment in vocational and technical education, and in the care and welfare economies, as well as in the green and digital transitions relatively small, the government is failing to productively use a considerable portion of its funds to improve the human capital and living conditions of many Cyprus citizens.

More specifically, it is quite incredible that Cyprus government finance figures show that the item “compensation of employees” rose by a staggering 14% to 1.2 billion euro in the first 4 months of 2024, after rising by 12.8% in 2023, while “capital expenditure” fell precipitously by over 16% to a lowly 206 million euro. Thus, by suppressing public investment expenditure and having revenues boosted by the positive impact of inflation on tax receipts the government has generated higher budget surpluses in the initial months of 2024 and continues to pile up its deposits/reserves at banks, which reached 5.5 billion euro at end-April 2024.

Widening inequalities

Hence, it appears that the Cyprus Government does not care about the welfare of the bulk of the population with its implementation of budgetary policies, but is much more concerned with producing budget surpluses and being the “best student in the class” in meeting the questionable EU fiscal rules[1] and in striving to obtain higher grades from credit rating agencies. Apart from the government being generous with the political and business elite and its employees, advisors and wealthy pensioners with salaries and other compensation, the rest of the Cyprus population is hardly benefiting from the current fiscally austere and self-centered policies of the Christodoulides administration. In truth, with persistent inflation and high loan interest rates, low and middle-income households are facing mounting cost of living pressures. Minimum and mandated wages in the private sector are being kept below living wage levels, and affordable accommodation is in increasingly short supply with a glaring lack of investment in social housing. In addition, social benefits are poorly-targeted and far-from-adequate in meeting the needs of deserving persons.

Furthermore, government officials cite figures on relatively rapid real GDP growth as demonstrating the good performance and management of the economy. But which segments of the population are benefiting from recent real GDP growth? An increasing proportion of GDP is being distributed to profits with the share rising from 24.2% in 2019 to 29.0% in 2023, while the share flowing in compensation to employees fell from 44.5% in 2019 to 41.1% in 2023.

Most notably, it is mainly employees in the public and finance and insurance sectors that have experienced considerable increases in their real disposable incomes over recent years, with the average rise for such incomes of government employees exceeding 5% over the years 2019 to 2023. In marked contrast, it is approximately estimated that the average real disposable incomes of private sector employees excluding those in the finance and insurance sector declined by at least 8% between 2019 and 2023 as inflation took hold and higher income taxes kicked-in. In truth, the average gross earnings of government employees of over 4,000 euro per month are more than twice the level of the monthly earnings of most employees in the private sector.

Furthermore, with the lack of decent employment opportunities and adequate housing becoming increasingly unaffordable the living conditions of younger persons and their likelihood of raising families have worsened. Thus, in view of the hardships being caused to a great number of employees in the private sector and many young persons it can not be concluded that the economy and its management are performing well.

Moreover, the government with its populist and sticking plaster reactive policies is giving minimal consideration to addressing the longer-term economic problems, that will adversely affect future generations.  Indeed, unless there is a substantial reallocation of resources to higher productivity sectors and firms at a time when the working age population in the Greek Cypriot community is projected to shrink over the longer-term, the continued and greater reliance of the leading retail and hospitality/tourism sectors on immigrant lowly-skilled workers will most likely suppress private sector wages. And the resultant lack of decent jobs requiring highly-skilled and trained personnel would further promote a brain drain from Cyprus and keep productivity relatively low.

In addition, the continued support of the rapidly expanding motor car economy and property development together with sluggish efforts to execute the green transition with new technologies and renewable energies will further damage the physical environment.

Recommended changes in government policies

Given that the government has made a mockery of the parliamentary-ratified budget for 2024 with its excessive current expenditures and the appointment of questionable “top-level” officials, the government should, firstly, bring its current expenditures on personnel under control by returning payments on the compensation of its employees and advisors to the approved budget estimates for 2024. And expenditure on soft and physical infrastructure projects should be accelerated toward meeting the approved targets for 2024. At the same time the government needs to adequately compensate and better target vulnerable and lower-income persons with social benefits to cope with mounting cost-of-living pressures rather than taking horizontal populist measures, such as irresponsibly delaying the filing of income tax returns, which disproportionately favor high income earners.

Secondly, beginning with the preparations of the budgets for 2025 to 2027 there is an urgent need to substantially reformulate planned economic and financial policies based on implementing the Recovery and Resilience (R & R) plan as well as on reforms agreed with the EU. In addition, the preparation and effective implementation of new investments and utilization of advanced technologies under the R & R plan will require improved institutional capacity, particularly in cooperation with banks on project evaluation and financing. In fact, Savvakis Savvides and this author have long recommended the establishment of an Independent development-type financing institution to competently evaluate and finance large scale investment projects.

Thirdly, the Cyprus authorities should use the tax system and regulations to channel resources to higher productivity firms and away from speculative property development and activities that damage the environment. Property development, transfers, and ownership need to be taxed more heavily in line with the average of other EU Mediterranean countries. Furthermore, the issue of building permits to property developers for the construction of apartment blocks and commercial establishments needs to be severely curtailed. And penalties on building contractors and property owners violating environmental regulations should be strictly enforced.

Fourthly, in Cyprus many companies rely on the non and/or delayed payment of taxes and debt and the underpayment of workers, especially to migrant laborers, to remain competitive and survive. These zombie and low productivity firms need to be phased out through enforcing legislation against tax evasion, debt delinquency and the abuse of the rights and compensation of workers, as they pre-empt resources for more economically viable firms and projects and keep wages in the private sector depressed.

Finally, and closely related to the above points there is an overwhelming need for the government to iron out the prolific corruption between government officials and politicians and private sector entities that plagues Cyprus and greatly inhibits genuine competition between companies as well as deterring would-be- entrepreneurs and reputable foreign entities from investing in Cyprus. And with wealthy persons and companies making much money from corrupt practices such as in the negotiation of Public Private Partnerships (PPPs) and in the award of tenders for large projects such as in the construction of marinas and not being penalized for their misdeeds, corruption continues unabated in Cyprus. Only, the prosecution and penalization of the political and business “elite” allegedly involved in corruption by the top legal authorities would significantly reduce corruption in Cyprus. But, failure to do so would continue to allow the wealthy and powerful to abuse the country’s resources with corrupt practices in order to make financial gains, and, thus, in the process widen inequalities further against the less wealthy ordinary citizens of Cyprus.