By Poly Pantelides
TECHNOCRATS had warned the previous government as early as 2008 to rein in expenditure but the cabinet and parliament would nonetheless approve inflated budgets, a finance ministry official told an inquiry yesterday.
“It was obvious that the economy was overheating especially in the real estate and construction sectors,” said Stavros Michael, head of the finance ministry’s state budget department.
He was testifying yesterday at an ongoing committee of inquiry looking into the country’s near-financial collapse.
Despite the warnings in view of the anticipated drop in revenues, by the time the budget went to parliament, state expenditure grew, Michael said.
“Economic theory states that if you have high, unusual revenues, you must not also increase spending. You must use them to pay back debt and leave spending alone to allow the economy to return to normality,” Michael said.
He said that in 2008 when they could see that the state’s increased revenues were temporary “based on conditions that could not be upheld” finance ministry technocrats recommended to their political supervisors to only allow up to 3.0 per cent increase in regular spending as a proportion of GDP and 5.0 per cent increase in spending for development. Instead, parliament approved a 6.1 per cent increase in regular spending and an increase of 26.8 per cent in spending for development. Successive suggestions were similarly ignored by Cabinet each year, including one advising zero rises in state expenses in 2010.
In 2008, the Demetris Christofias’ government inherited a budget surplus of 3.5 per cent of the gross domestic product (GDP) but closed the year on a 0.9 per cent surplus. The state started running on a 6.1 per cent deficit in 2009, dropping to 5.3 per cent in the following year before jumping to 6.3 per cent in 2011 and 2012.
Public debt grew from 48.9 per cent of GDP in 2008 to 85.8 per cent in 2012, Michael said. The debt jumped to 58.5 per cent in 2009, 61.2 per cent in 2010 and 71.1 per cent the following year.
Meanwhile, the economy was slowing down, after years of overheating.
“In economics, the magic word is ‘trend’. It is not just about figures,” Michael said.
The finance ministry was expecting the property bubble to burst leading to smaller or negative growth, he said. “Those indicators have an immediate impact to state revenues that grow with development and contract with less growth. Spending must be adjusted accordingly.”
But the ministry technocrat charged that the Christofias administration failed to take timely action to address deteriorating state finances.
“My view is that measures were taken with significant delays. They should have been taken much sooner,” Michael said. By early 2010, a series of suggestions “with all necessary measures” were lodged to remedy the situation but despite plenty of discussion no action was taken until more than a year later, Michael said.
By 2011, when measures were first taken to address fiscal imbalances, Cyprus was effectively excluded from borrowing from international markets, due to successive downgrades by credit rating agencies.
“The lack of trust and impression there was something wrong with Cyprus did not help push the economy forward. But if the state cannot borrow abroad it has to look to the domestic market, taking away funding from the private sector. This causes a chain reaction.”
Michael said that the only available option to the government at that moment was seeking EU support, and not leave it until a year later in June 2012.
“In finances, time is very important,” he said.