2023 state budget is not an ‘electioneering ploy’ says minister (Updated)

Finance Minister Constantinos Petrides on Monday defended the 2023 state budget as being a “responsible” one, with substantially augmented spending on social assistance as well as growth-oriented projects.

He was speaking at the House finance committee, which kicked off discussion of the budget for fiscal year 2023, and where opposition MPs derided the government’s balance sheet as an electioneering ploy.

As submitted to parliament, the 2023 budget sees a €525 million rise on this year’s – driven primarily by higher operating costs and increased social spending. It features a 4 per cent increase on social spending, and 12 per cent on development spending.

Petrides told lawmakers the budget is geared at assisting economic recovery, while also keeping a sound fiscal position.

According to the government’s forecasts, in 2023 GDP growth will slow down to 3 per cent, down from the estimated 5.7 per cent for this year.

Calling the Cypriot economy “resilient”, Petrides said Cyprus was the only country in the EU registering economic growth.

Regarding policies, the economy czar said the government will temporarily put the brakes on the planned tax reform drive. Pushing through the reform now, he argued, would be grossly irresponsible given inflation and the uncertain economic environment globally.

On inflation, the minister noted it would “logically” recede at some point, while energy prices have already started to subside. But overall, fuel prices would remain at high levels.

For its part, the Central Bank of Cyprus estimates that the annualised inflation rate this year will come to 8.4 per cent, retreating to 3.9 per cent in 2023.

Petrides cited EU indexes showing a sharp decline in income inequality as well as improved ‘social cohesion’ indicators. These belied the criticism of government policies coming from the opposition, whom Petrides accused of engaging in cheap points-scoring ahead of February’s presidential elections.

On the risks ahead, the minister cited a possible extended period of high inflation, a rise in non-performing loans, and the “immense challenge” of migratory flows that could put a strain on the welfare state in the long run.

Taking questions from MPs, Petrides said that by next month the government should make public its proposal to tax energy companies’ windfall earnings driven by the spike in energy prices. This tax revenue would be redistributed to consumers to ease some of the pressure from the rising cost of living.

The government is currently working out a formula on how to tax windfall earnings.

But the minister also sought to temper expectations from this planned measure, noting that windfall earnings would be in the range of only €5 million to €10 million.

In parliament, Tax Commissioner Sotiris Markidis said they are currently drafting new legislation to correct the issue of the low VAT on property paid by foreign nationals through the now-defunct citizenship-by-investment (CBI) scheme.

Several CBI applicants had applied for, and got, the reduced VAT rate on property purchases. Many of these properties are vacant, Markidis added.

Central Bank governor Constantinos Herodotou said the Cypriot economy has for the moment managed to absorb the shocks from the global economic turmoil, primarily as a result of the war in Ukraine. But the impact on GDP would manifest over time, particularly as services exports take a hit.

According to Herodotou, despite the loss of Russian tourists, revenues from tourism during the first seven months of 2022 went up 141 per cent compared to the same period last year.

Discussion of the state budget, by government ministry and department, will continue throughout the month of November. The three-day plenary session to approve the balance sheet is set for December 6, 7 and 8.