The European Commission on Wednesday urged Cyprus to take corrective measures as it risked missing its budgetary targets for 2017.
Finance Minister Harris Georgiades defended the government policy, arguing that any measures would undermine growth.
“Overall the commission is of the opinion that the draft budgetary plan of Cyprus, which is currently under the preventive arm of the SGP (stability and growth pact) and subject to the transitional debt rule, is at risk of non-compliance with the provisions of the SGP,” the commission said. “The commission projects a significant deviation from the MTO (medium term objective) in 2017. In particular, the draft budgetary plan for 2017 plans a fiscal relaxation without compensatory measures, which leads to a risk of significant deviation from the adjustment path towards the MTO in 2017.”
The commission urged the government to take the necessary measures “within the national budgetary process” to ensure compliance with the stability and growth pact.
It also said Cyprus had made some progress with regard to the structural part of the fiscal country-specific recommendations issued by the European Council but invited the authorities to make further progress.
According to the definitive European Commission decision on Wednesday, five countries – Germany, Estonia, Luxembourg, Slovakia and the Netherlands – were found to be compliant with the requirements for 2017 concerning their budgetary plans.
But for six countries – Belgium, Italy, Lithuania, Slovenia, Finland and Cyprus – the draft budgetary plans pose a risk of non-compliance with the requirements.
The decision follows a letter from European Commission vice-president Valdis Dombrovskis and economic and financial affairs commissioner Pierre Moscovici to Finance Minister Harris Georgiades last month, in which they issued similar warnings and called for additional fiscal consolidation measures.
In a three-page letter of response at the time, Georgiades had said Cyprus, which successfully exited its three-year bailout adjustment programme in March, has had a surplus primary balance since 2014, adding that Cyprus was a top performer for the two previous years among EU states.
“Cyprus is expected to continue being the EU top performer in 2016, with an estimated primary surplus of 2.3 per cent of GDP,” he said.
Georgiades added that the fiscal outcomes achieved by Cyprus represented a continuous overperformance on the programme targets, which could not be attributed to a better than expected macroeconomic environment.
“In fact, it shows the significant effort and determination exerted by the Cyprus authorities resulting in the formulation and execution of a prudent fiscal policy which, among others, included a frontloaded reduction of public expenditure by 14.5 per cent cumulatively in 2012-2014,” he wrote.
On Wednesday, Dombrovskis said the methodology employed by the commission in evaluating Cyprus’ draft budget plan was the only one that had been mutually agreed and accepted by all member states.
“There are many questions and discussions on methodology, there is a work ongoing, that started in Amsterdam on assessing the commonly agreed methodology, what improvements can be done and more, especially on the so-called possibility check,” Dombrovskis said.
“While discussions are ongoing we still apply the only commonly agreed rules we have.”
The major fiscal effort made by Cyprus must be acknowledged, Dombrovskis added, noting that predictions suggest a 0.6 per cent fiscal deficit this year and 0.4 in 2017.
“Cyprus has the highest primary surplus in EU,” the commission vice-president said.
Georgiades responded later in the day that Cyprus noted the European Commission’s warnings on the draft budget, but he insisted on the ministry’s own estimates on the structural deficit. Additional fiscal measures would hurt the economy’s growth prospects, the minister said.
“We carefully note the European Commission’s warnings and reiterate our commitment to continued prudent fiscal management,” Georgiades told the Cyprus News Agency.
“However, we insist on our own estimates, which are based on the real facts and economic performance. Additional measures would be not only unnecessary, but also counterproductive, as they would undermine the growth prospects.”
The European Commission in its decision said for other four countries – Ireland, Latvia, Malta and Austria – were found to be broadly compliant. For these countries, the plans might result in some deviation from the adjustment paths towards each country`s medium-term budgetary objective.