Cyprus Mail
CM Regular ColumnistOpinion

Government budget is inappropriate and inadequate

file photo: people shop in a supermarket as rising inflation affects consumer prices in los angeles
FILE PHOTO: People shop in a supermarket as rising inflation affects consumer prices in Los Angeles, California, U.S., June 13, 2022. REUTERS/Lucy Nicholson/File Photo

Failure to address social and economic needs

By Les Manison

The budget is the main instrument of government policy for meeting the social and economic needs of its citizens. Indeed, a prosperous and healthy country requires high levels of public expenditure, on infrastructure, education, healthcare, technology, security and social and environmental protection, and the government needs revenues to sustainably finance as well as the institutional capacity to efficiently implement these expenditures.

But, it appears that budgets prepared by the finance ministry for 2023 to 2025 are just directed toward pleasing credit-rating agencies and the EU by imposing fiscal austerity and projecting surpluses. Indeed, budget expenditures and measures for addressing social needs in the face of the mounting cost of living crisis are far from adequate, while funds earmarked for real development expenditures remain appallingly low.

 

Government surpluses and policies

Against the background of austere policies that are projected to reduce real government expenditures by around 4 per cent in 2022 and produce an overall surplus of an estimated 1.2 per cent of GDP, the proposed government budget for 2023 projects a higher surplus of 1.7 per cent of GDP. Indeed, with its budget projections for 2023 the government will be taking more spending power out of the economy at a time when private sector activity is likely to face strong headwinds from an expected recession in Europe and tighter financial conditions. Moreover, the budget for 2023 will do little to help lower-income households with only a 3.2 per cent increase in social benefits and no reduction in tax rates planned, despite their real incomes falling by at least 10 per cent over the last 18 months.

In contrast with Cyprus, other euro area countries, except Ireland, project fiscal deficits with most allocating large sums to meet social needs and instituting tax cuts. The majority of euro area countries including Belgium, France, Italy and Greece have specific new and extended measures in their budgets to help counter the adverse effects of soaring prices and costs on households and businesses. However, the extremely limited amount of social expenditure in the Cyprus budget for 2023 indicates that the government does not really care about the social and economic welfare of most of its citizens and is more concerned about raising the salaries of its rapidly expanding number of employees and advisors. In this connection it is highly likely that full cost of living adjustments will be confined to public sector and bank employees, with no pressure or measures to extend CoLA to most, albeit more-deserving, employees in the private sector.

Furthermore, in contrast to most other Eurozone countries, the Cyprus budget does not incorporate cuts in taxation rates for persons and corporations aimed at raising their disposable incomes. And by projecting that income receipts from the self-employed will rise by only 1.9 per cent to a very modest €64 million over the three years to 2025 the budgets reveal that the government is not serious in its promise to combat tax evasion.

In addition, with no official plans to institute further reductions in VAT rates and excise duties the Cyprus government will continue rely on an increasingly regressive tax system to finance budget expenditures.

 

Belgium

In the proposed 2023 budget for Belgium a fiscal deficit of 5.8 per cent of GDP is projected owing mainly to measures to cope with rising energy prices and the granting of automatic cost of living adjustments covering 100 per cent of employees. While the EU’s Economic Commissioner Paolo Gentiloni acknowledged that “in normal times CoLA was a bad thing for competitiveness”, he said that “because of the social component now was not a good time to change the CoLA system”. And Belgian Prime Minister Alexander De Croo in replying to criticism that measures to assist the population against the cost-of-living crisis raised the deficit excessively said “should we leave anyone behind?” and “should we perhaps have left our middle class out in the cold?”

Measures in the proposed Belgian budget include a permanent reduction in VAT rate to 6 per cent on gas and electricity consumption to be compensated by an adjustment of excise duties when prices normalise. A “health shift” involving increased VAT on unhealthy products and reduced VAT on healthy products such as fruit and vegetables is planned as well.

And to raise revenue to partly offset losses from the tax cuts an excess profits tax on energy producers is proposed.

 

France

The proposed government budget for France projects a deficit of 5.3 per cent of GDP for 2023. It focuses on protecting households and businesses from soaring energy prices. France will spend €45 billion on state subsidies to keep energy prices down. Already in 2022 the government has frozen gas prices and capped the rise in electricity prices at 4 per cent.

There will be extra help for those on lower incomes, as well as tax adjustments costing €6.2 billion that are designed to help poorer families.

 

Italy

In the proposed government budget the deficit is projected at 4.5 per cent of GDP. In presenting the budget Prime Minister Georgia Meloni stated that there were two priorities, namely to sustain production and provide for social needs including “assisting low-income workers”. In response, the cabinet approved €35 billion of measures aimed at supporting households and businesses from soaring energy bills and a series of tax cuts to spur economic growth.

Reflecting tax cuts “around €4.2 billion goes to reducing the ‘tax wedge’ – the difference between the salary an employer pays and what a worker takes home – with the benefit mainly going to low-income workers”.

The budget cuts the VAT sales tax on essential consumer staples such as baby-care products like nappies and female sanitary tampons from 10 to 5 per cent.

And the windfall tax on excess profits of energy companies is to be increased from 25 to 35 per cent.

 

Greece

Greece’s draft state budget for 2023 projects a deficit 1.8 per cent of GDP and includes lower taxes for citizens, and an increase in salaries for civil servants.

“The total amount of interventions (some listed below) is €3.2 billion (or 1.3 per cent of GDP). Revenues lost will be replaced exclusively by the growing economy and control of tax evasion”.

More specifically new measures include:

  • abolition of solidarity contribution tax on all incomes as of January 1, 2023 (€1.24 billion);
  • raising of main pensions of 1.5 million pensioners by 6 per cent (over €600 million);
  • extension of tax cuts for businesses hiring more full-time persons for at least three months;
  • subsidisation of 50 per cent for student housing;
  • extending low VAT to transport, coffee, non-alcoholic beverages, gyms, dance schools, films, and tourism packages to June 2023; and heating oil by around 0.25 per cent
  • continuing, if circumstances allow, the subsidy of euro per litre into 2023 beyond its current expiration date at end-2022.

 

Private sector employees are suffering

Households relying heavily on incomes of private sector employees are among those suffering the most from the ongoing cost of living crisis. It is really disturbing that both the government and private sector employers show little passion and give pitiful consideration to the fact that most private sector employees have experienced large falls in their real incomes since mid-2021. Indeed, Eurostat figures reveal that the net incomes of 27.5 per cent of Cyprus households decreased in 2021, this proportion being the highest among EU countries. And in addition 40.5 per cent of Cyprus households had their net incomes remaining unchanged in 2021. Furthermore, with the “increase” in incomes of employees, particularly those in the private sector, falling well behind the rate of inflation in 2022, the loss in purchasing power must have approached at least 10 per cent for a large number of households over the last 18 months.

 

What can be done?

The Cyprus budget for 2023 should allocate more funds to meeting the financial needs of households and businesses facing the cost-of-living crisis. With private sector activity and incomes subdued and official reserves at around €5 billion the government needs to and can afford to run a sizable deficit in its operations.

Social benefits such as for unemployment, disabilities and blind persons, as well as for the social pension, should be raised by at least 10 per cent.

Many private sector employees have protected their profits against rapid inflation by raising the prices of their products. Should not their employees be protected against soaring prices by being granted CoLA? Hence, it is recommended that employees who have worked for at least 12 months and earn less than €1,200 per month be given full CoLA, while the wage adjustments for those employees earning more per month, up to €3,500, should be moderated receive to one-half CoLA.

And more funds need to be allocated to improve the government’s institutional capacity for the efficient processing and quick payment of social benefits through advancing the digitisation of operations in the Ministry of Labor and Social Insurance and by employing competent managers and staff.

 

Leslie G Manison is an economist and financial analyst, specialising in macroeconomic policy analysis, bank viability assessments and international financial relations. 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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