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EU likely to ask for budget cuts next spring, fiscal council member says

Eurogroup president Jeroen Dijsselbloem

A year after completing its adjustment programme, Cyprus could be asked to create a fiscal buffer after a combination of tax relief and spending hikes stimulated the appetite for pay rises, an economist said.

marios-zachariadis“They see bad omens,” Marios Zachariadis, who teaches economics at the University of Cyprus said in an interview to state radio CyBC on Tuesday.

Zachariadis, who is also member of the Fiscal Council, a watchdog tasked with monitoring fiscal planning and policy, said that at a “sensitive moment,” observers at home and abroad, including Brussels, have witnessed a decrease in non-cyclical revenue, such as the immovable property tax, combined with an increase in expenditure which “stimulates the appetite” to demand further increases in public spending.

His comments came a day after the Eurogroup, the council of euro area finance ministers, reaffirmed the European Commission’s opinion that Cyprus, whose economy is expected to expand close to 3 per cent this year and in 2017, was at risk of non-compliance with the stability and growth pact’s budget rules and may therefore be required to take additional fiscal consolidation measures.

“We are in a period in which we know we will have growth,” he said. “It is very likely that pressure from the EU Commission or the Eurogroup will increase for us to take some additional measures,” Zachariades said.

On Monday, the fiscal council also reaffirmed its opinion that Cyprus is at risk of deviating from the 2017 fiscal targets. The council “has therefore decided to re-evaluate the budget position for 2017, after the European Commission publishes its spring economic forecasts and the finance ministry publishes the budget results of the first quarter of 2017”.

Zachariadis said that while Cyprus’s fiscal deficit, projected to range around a half percentage point in 2016 and 2017, “is indeed very small,” creating a fiscal buffer could help the economy perform better when times get hard. Populism is on the rise world-wide and causing economic uncertainty, he continued.

“The EU is based on certain estimations that a 3 per cent growth rate is somewhat more than what we should be expecting over the future and we should therefore be more prudent,” he said.

The government’s counter argument is that while unemployment remains at around 12 per cent, there is still potential for the economy to grow further, which, according to Zachariadis, has to be taken into account. Therefore, the finance ministry should prepare its own structural deficit estimation that takes unemployment into account, instead of focusing entirely on the actual fiscal deficit, he said.

The economist added that the abolition of the immovable property tax was a mistake as it did not have any negative impact compared to other taxes.

“If taxes had to go, some other taxes had to be scrapped,” he said.

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