By Les Manison
The state budget is the main instrument for allocating resources geared to meet the government’s policy objectives and reforms. And with the devastating impact of the coronavirus on society and the economy governments have been required to become more active in supporting suffering households and struggling businesses through transfers of resources to beneficiaries via government budgets.
In his speech to the Cyprus people to usher in the New Year President Anastasiades referred to key priorities of his administration, namely financial support for those businesses and households adversely affected by the second wave of Covid-19 and the need for “the continuation of the reforms concerning the modernisation of the country”.
Socio/economic support
Anastasiades stated that “our priority is the health and life of the citizens and the safeguarding of the country’s health system” and adding that “the government attaches importance to the viability of companies, saving jobs and the protection of the vulnerable groups”. At the same time Education Minister Prodromos Prodromou has said that artists calling for financial assistance will be supported if the budget is approved.
While these promises of government financial support stated by the president and ministers are most worthy, the proof of the pudding will be whether the budget allocates sufficient resources to achieve such objectives and, moreover, whether specified measures of support are effectively implemented on time and provide adequate assistance. It is noted that in approving the budget for 2020 in December 2019 it was decided to increase compensation for pensioners with low incomes, yet this decision was only implemented retroactively in December 2020. Thus, members of the House of Representatives will need to carefully scrutinise the amended budgets to ascertain whether they include sufficient funds for supporting households and businesses hurt by the pandemic including unemployed and underemployed persons, struggling small companies, the self-employed, and artists and other vulnerable groups.
Furthermore, there should be regular monitoring by both the government and the House of the actual disbursement of funds to the various groups claiming socio/economic support to assure that such transfers are reaching beneficiaries on time. In this connection it cannot be argued that the government does not have the funds to punctually effect payments for social transfers as they had deposits of just under 5 billion euros at the Central Bank at end-November 2020 and over one billion euros of deposits at other banks on the same date.
It is noted that further on in his speech President Anastasiades commented on pending reforms saying that there is a need to create a social welfare ministry “to improve and upgrade the welfare state”. Such a statement would seem to imply that the administration of social welfare benefits is deficient and that adequate support is not being distributed to many deserving persons. Hence, it would be advisable if House members press with some urgency on legislation to establish a well-functioning social welfare ministry.
Reforms
President Anastasiades refers to the priority of implementing several pending reforms to modernise the country. While reforms such as the digitisation of public services and the completion of setting up a National Health System will require allocations of funds in the 2021 budget, other reforms including a package of bills to combat corruption and the creation of “an autonomous administrative for culture” need legislative approval before any funds are allocated for carrying out these reforms.
Although the need for essential reforms listed by the president such as those of the education and justice systems as well as for local government existed before the spread of Covid-19, its impact has exposed and aggravated the vulnerabilities and inequalities of society and the economy. But policy initiatives and reforms for diversifying the economy to generate inclusive and more balanced growth as well as for overhauling the tax system and its administration are conspicuously lacking. That is, the heavy reliance of the economy on the vulnerable tourism and construction/real estate sectors that depend importantly on foreign demand is not being dealt by diversifying the economy through investments for instance in new facilities, activities and research in the healthcare and education sectors.
The budgets for 2021 to 2023 should be amended to include investments that contribute to the diversification of the economy rather than keeping just 1.5 per cent of GDP for capital expenditure projects. And to make room for increased public investments, salaries of government employees, which amount to around 2.9 billion euros or 14 per cent of GDP, should be frozen at 2019 levels instead of being budgeted to rise by 13 per cent over the three years to 2023.
However, it should be stressed that when efforts have been made to contain government expenditures such as in response to revenue shortfalls, as could be the situation in 2021, it is outlays on public investment projects that have suffered the largest cutbacks. This possibility should be safeguarded against through constant checks on the rate at which public investments are being implemented and on whether funds available from the EU for project financing are being absorbed both punctually and effectively.
As outlined in previous articles the tax revenue forecasts underlying the financing of the budget for 2021 are particularly optimistic. In order to assure adequate non-debt financing of budgets over the medium term and to assist in mitigating mounting income and wealth inequalities there is a compelling need to reform the design and administration of the increasingly regressive tax system of Cyprus.
The structure of personal income tax rates should be made more progressive and a progressive immovable property tax reintroduced so that those persons with greater incomes and wealth pay their fair share of taxes. In addition, serious efforts must be effected to combat the prolific tax evasion that plagues Cyprus and benefits most disproportionately the rich. In fact the Audit Office in its latest report calls for “the Tax Department to take all necessary measures to reduce the uncollected debts of the State (2.21 billion of tax arrears at end-2019)” which the auditor states “are increasing to a worrying degree”.
Indeed, in voting for the approval of the 2021 budget MPs should commit to only considering a vote on the budget for 2022 on the condition that concrete progress is registered in reforming the tax system and in rigorously tackling tax evasion during 2021.
Leslie G Manison is an economist and financial analyst. He is a former senior economist at the International Monetary Fund, an ex-advisor in the Cyprus finance ministry and a former senior advisor at the Central Bank of Cyprus
