Finance Minister Harris Georgiades said on Thursday the European Commission got it wrong when it warned the Cypriot economy would overheat unless the government slashes spending and raises taxes, “something we shall not do’, he said.
He was commenting on the Commission’s country report on Cyprus issued earlier this week, which reviewed progress in implementing reforms.
The Commission critiqued the delay in implementing fiscal structural reforms combined with the abolition of the property tax and the increase in spending to argue that Cyprus’s structural fiscal balance was a risk.
It said Cyprus continued to face excessive economic imbalances and did little to address them in certain cases.
Addressing MPs at the House watchdog committee, Georgiades said the government was clamping down on tax evasion instead in order to increase revenues, and he singled out souvlaki shops, which in one night might earn as much as a lawmaker in a month without even being registered with tax authorities.
Regarding the country report issued on Wednesday by the Commission, Georgiades said in certain areas it was more optimistic than the Cypriot government, citing the fiscal deficit forecast for 2017 as an example.
While the government expects a fiscal shortfall of 0.6 per cent of economic output, the European Commission forecasts a 0.2 per cent deficit.
Georgiades proceeded to throw cold water on the Commission’s findings, noting that its warnings about the economy overheating are shared neither by the International Monetary, nor the Eurogroup nor the EU’s Economic and Financial Affairs Council (ECOFIN).
Where the Commission had got it wrong, he said, was its focus on Cyprus’ “structural deficit, not the actual deficit which is nil, but a so-called structural deficit.”
The structural deficit cited by the Commission was a hypothetical number, he added.
But this did not correctly factor in Cyprus’ output gap.
The output gap is the amount by which the actual output of an economy falls short of its potential output
“As paradoxical as it may sound, Cyprus has been deemed to not have an output gap, that it is going through a period of overheating and that we should consequently levy taxes to rein in growth,” Georgiades noted.
“This we shall not do, as we disagree with that assessment.”
To bolster his argument that the economy had the potential for more growth, Georgiades cited the decline in joblessness, with the employment rate rising by 2.7 per cent in 2016.
Therefore, he added, the flight of manpower has been reversed.
“From 2009 to 2014 we lost about 10 per cent of our GDP…but economic recovery is underway and we are recovering the lost ground.”
On the Commission’s remarks regarding Cyprus’ ranking on issues of income inequality, the minister countered that in 2008, 23.3. per cent of the population was at risk of poverty and social exclusion.
By 2013, this figure had risen to 27.8 per cent of the population, at a time when the state was spending €1 billion more than it was earning.
“So despite spending with abandon, the poverty and social exclusion index was skyrocketing.”
At present, the index was at 28 per cent of the population. The index was expected to drop further as the results of the economic recovery kick in, Georgiades noted.
Asked about welfare spending, the minister said that the actual expenditures by the labour ministry in 2015 were €912 million, rising to €960 million in 2016.
In spite of this increased spending, the state managed to close 2016 with a balanced budget, he added.
The European Central Bank (ECB) has set a hard target, or ceiling, of 2 per cent inflation in the eurozone. For this year, the ECB has indicated it wants to put the brakes on monetary easing and start preparing for interest rate hikes.
The ECB largely espouses the model that inflation is an inverse function of unemployment. Stated simply, decreased unemployment, (i.e. increased levels of employment) in an economy will correlate with higher rates of inflation.
But critics point out that’s putting the cart before the horse. They argue that it is in fact central banks and their monetary policy which cause inflation, and one of the results of inflation is that prices rise, including the price of labour.