By Stefanos Evripidou
THE GOVERNMENT hopes to save €700m of taxpayers’ money next year without implementing further pay cuts in the public sector or increasing taxes during a recession, said Finance Minister Harris Georgiades yesterday.
He made the comments ahead of today’s first meeting with a troika team here to evaluate the island’s progress in implementing its adjustment programme as set out in the memorandum of understanding with international lenders.
The minister expressed optimism that the evaluation would have a positive outcome.
“The government’s readiness to implement an extensive modernisation programme is a given,” Georgiades said. “The government’s readiness to consistently implement what was agreed is well known.”
The 30-strong troika delegation, including the IMF’s mission chief for Cyprus Delia Velculescu, will wrap up its first review of the adjustment programme by the end of the month, providing lenders (IMF, European Central Bank and European Commission) with a clearer picture of where Cyprus stands in terms of progress, or not.
The troika will start their evaluation with a meeting with Georgiades and Governor of the Cyprus Central Bank (CBC) Panicos Demetriades at the finance ministry this morning.
Speaking to the press yesterday, Georgiades said: “The government worked intensively in the preceding period, I am optimistic that we will have a good result through the review process.”
He noted that obligations deriving from the memorandum can be divided into three sectors: structural changes that have to be made; public finances; and, the most “critical”, the financial sector.
The structural changes have been a long time coming, though change is never easy, said Georgiades, adding, “which is perhaps why decisions were postponed for years”.
“Now we are ready to implement these changes,” he said, referring to work already started on changes to the benefits system, public health and public sector.
Regarding public finances, he vowed to fix the errors of the past, noting: “For many years as a state we lived beyond our means, spending in recent years one billion euros more than we collected as a state.”
Perhaps intended as an early message to the troika, the minister highlighted that additional taxes to the ones already implemented as part of the adjustment programme would not be a good idea.
The government will emphasise to the troika that the effort should be on curbing state spending, not further “increasing state revenue which during a recession cannot be effective”.
In case the message was not clear enough, he added: “Tax increases decided, implemented and included in the memorandum do not produce the expected results.”
The state has not seen an increase in tax collection as a result of tax increases. This will only come when the banking sector gets back on its feet, helping to kickstart the economy.
“Only this way will we stop the rise in unemployment” and slowly see an increase in tax revenue, he said.
Instead of state revenue, the government will focus on rationalising state expenditure: “During a recession, the state cannot continue spending like nothing was happening.”
The goal is for a reduction of 11 per cent in the 2014 state budget compared to 2013 (before the interest on debts is paid), counting for €700m in savings.
Georgiades acknowledged that the state payroll “in relative terms is the largest in Europe, and must be reduced” but drew a distinction between reducing the state payroll and reducing salaries.
Reducing the state payroll won’t necessarily come from a reduction in salaries in the public sector but through “the containment and downsizing of the public service, strict compliance with the no further recruitments policy following retirements, and also through the review of all benefits like overtime and shift allowances”.
“Salaries are not safeguarded with political statements and declarations, which would be easy on my part,” he said, adding, that salaries are safeguarded based on the real capabilities of the economy and public finances which cannot be out of step with the real situation of the economy.
Georgiades commended the decisiveness of Ireland in implementing its own adjustment programme and managing to return to international markets faster than expected.
Cyprus needs to operate in the same way if it wants to correct “difficult” provisions in the memorandum and free itself from the supervision of the troika, he said.
Asked why the government does not follow Ireland’s lead with significant pay cuts in the public sector in collaboration with the unions, he said the government won’t repeat Ireland’s actions step for step.
“We have our own programme.”
Regarding the financial sector, the government and the CBC have taken on board the message from international lenders that no additional measures of assistance will be taken until the Bank of Cyprus exits from its resolution status.
This in turn will open the path for the eventual lifting of all capital control measures, said Georgiades.