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EU Covid funds must be focused on narrowing inequalities 

cube tech fair in berlin
Decent employment opportunities for persons participating in training programmes in digital skills and the green economy must be provided
Government’s draft recovery plan still relying too much on boosting tourism and property investments

By Les Manison

The recent release of national accounts, public finance and employment “estimates” for 2020 indicates that Cyprus may not have experienced the severe recession and large government deficit predicted by a number of economists including this author.

However, such data reveal that many of the economy’s underlying problems including wide inequalities in income, wealth and intergenerational have become more acute. And these inequalities, although becoming more exposed and exacerbated by reactions to the spread of Covid-19, are attributable mainly to past and ongoing policies of the government. Accordingly, this article focuses on how certain government policies need to be changed and directed toward dealing with inequality issues.

Widening inequalities

The latest national accounts estimates showing that national income per head fell by 7.3 per cent in 2020 and contributed importantly to the marked decline in the standard of living of the average Cypriot over the last year. But what is even more disturbing is that the rate of decline in the income of low wage earners was much more than that of high wage earners. A survey by Eurostat for the March to June period of 2020 covering the first pandemic wave shows that the employment income of low wage earners in Cyprus fell by over 11 per cent compared with the corresponding months of 2019, whereas the decline for middle wage earners and high wage earners was 8 per cent and 6 per cent, respectively.

These Eurostat figures on the widening inequalities in the distribution of employment income are consistent with recent data for the full year 2020 published by Cystat, which broken down, indicate that average incomes of the more highly paid public sector employees rose by around 3 per cent, while those of the more lower paid private sector employees fell by over 6 per cent. Furthermore, lowly paid workers in the private sector have not only had their wages reduced, but many have lost their jobs and have been inadequately compensated with fiscal support. And most workers in the large informal economy are even worse off through not receiving any government support at all.

Government finances in 2020 were adversely affected by the repercussions of the Covid-19 crisis, with tax receipts declining sharply owing to falling incomes and official suspensions for tax payments.

Consequently, with its large deficit and desire to build up reserves the government borrowed heavily in international markets, raising its debt to GDP ratio from 94 per cent at end-2019 to 118 per cent at end-2020 and further to over 120 per cent by end-February, 2021. And with this debt accumulation intergenerational inequality is further compounded in so far as the younger generation will be burdened with higher future tax payments.

Creating decent jobs

At present the prime economic policy focus of the government is on promoting a recovery of economic activity by lifting restrictions, especially on the tourism/hospitality sector, that have impeded GDP growth. While some attention for reviving the economy over the medium-term is centred on reforms and investments associated with the conditional use of funds from the EU’s Recovery and Resilience facility, policies for the next few years as reflected in the government’s Medium-Term Budgetary Framework for 2021 to 2023 are still geared mainly toward boosting tourism and investments in the property market as well as relying on buoyant consumption to generate real GDP growth. And with such growth it is expected that there will be increases in employment that will reduce the unemployment rate.

But, specific policies for dealing with the mounting inequalities afflicting Cyprus through creating more decent job opportunities and distributing the growing GDP and income pie more fairly are not evident. More low-paying jobs serving the mass tourism/hospitality and retail sales markets are hardly going to narrow existing inequalities.

Surely the best way to reduce inequalities in Cyprus is to create more well-paid decent jobs and in the process contribute to more inclusive and equitable growth. And in this connection it is disappointing that the finance ministry’s draft “Recovery and Resilience Plan” hardly assigns any emphasis or priority to programmes and investments that can contribute importantly in creating decent jobs. Indeed, what is needed is an overarching plan on how resources should be allocated with a prime focus on providing decent employment opportunities, especially for the younger generation.

Notwithstanding, if the Recovery and Resilience plan can be substantially modified to give more priority to the goal of creating good jobs using more labour-intensive technologies then its effective implementation offers considerable potential for contributing to reducing income and wealth inequalities.

As the plan is directed importantly to transiting Cyprus to a “greener” and more “digitised” economy decent employment opportunities for persons participating in training programmes in digital skills and the green economy are likely to be provided, especially for persons with good information and smart technology skills.

But beyond training programmes and enhancing employees in particular with digital skills, would the implementation of the Recovery and Resilience plan offer significant potential for the creation of a substantial increase in employment opportunities? The green and digital transitions as well as the building of infrastructure in the healthcare and education sectors provide opportunities for the construction sector to shift resources to undertaking new investments and employing skilled personnel for engaging in more complicated and technologically advanced projects. For example, the proposed submarine cable to Greece and other links to install and upgrade connectivity to the region’s most important internet exchanges require construction. And with the transition to electricity-powered cars there is need for the installation of electricity charging stations. The plan calls also for the construction of two model technical schools and of high energy performance new schools, as well as the expansion of emergency and accident units across all state hospitals.

For creating decent job opportunities in the public sector and non-profit institutions it is noted that in the draft Recovery and Resilience plan 64 million euros has been earmarked for research and innovation. In this respect the establishment of the proposed “Knowledge Transfer Office” and other research units should offer good job opportunities for many scientists. Most importantly, a plan recommendation to “modernise recruitment procedures and criteria and performance appraisal system in the public services”, if effectively implemented, provides much potential for recruiting skilled personnel to and promoting competent employees in the public sector.

Taxation reform

The government will require additional resources to support the sustained recovery of the economy including funds needed to co-finance certain investment projects with the EU. Tax revenues, which are low by European standards, fell sharply in 2020. In fact, there is a compelling need to raise revenue by making the increasingly regressive tax system more progressive through applying increased rates on higher personal incomes and bringing back a more progressive central government tax on immovable property. And it is crucial that serious action is taken to combat the prolific tax evasion plaguing Cyprus.

The Tax Department needs to be staffed with apolitical managers and more tax assessors and inspectors which have the political backing to objectively carry out their responsibilities. In addition, modernising the customs and electronic payments systems and integrating VAT and income tax information could improve tax administration efficiency significantly, including in reducing the lengthy time period of 5 to 6 years between the submission of personal income tax returns and their assessment. And to encourage tax compliance, electronic procedures and forms for submitting tax returns need to be much simplified.

Indeed, by collecting more tax revenue from persons who have the greater ability to pay, the government would have enhanced its resources to effect social protection payments to lower income and vulnerable persons and thus contribute to reducing income and wealth disparities through redistribution.

 

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

 

 

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