Payment of the cost of living allowance (CoLA) could saddle taxpayers with a whopping €1.2 billion over the next three-year period, local media reported on Monday.

Under a deal struck between trade unions and employers last week, CoLA payments will start in June. The allowance will be paid out at 66.7 per cent of the consumer price index, up from the current 50 per cent.

The agreement put an end to a long-running dispute that had led to nationwide strikes.

The deal – thanks to the mediation of the labour ministry – was greeted with much fanfare and commentary about the restoration of ‘labour peace’.

But in a report on Monday, news outlet Stockwatch highlighted that CoLA will cost the state an estimated €1.2 billion over the 2023-2025 period.

The outlet cited sources familiar with the calculations done by finance ministry technocrats.

The overall cost of CoLA includes an adjustment to the earnings of civil servants, employees of semi-governmental organisations, employees of local government (municipalities), as well as public-sector pensioners.

According to Stockwatch, the €1.2 billion calculation is based on assuming 3.2 per cent inflation this year, and 2.5 per cent inflation for 2024.

Currently, the workforce in Cyprus numbers 430,000 – of whom 77,000 work in the broader public sector. All public-sector workers are eligible for CoLA.

Of the remaining 353,000 people working in the private sector, just 28 per cent get CoLA.

Private-sector employees eligible for the allowance are those working in the hotel and construction industries, plus certain industries engaged in the manufacture of pharmaceuticals, and some individual factories.

The outlet quoted economist Mike Spanos, who said that CoLA is paid chiefly to public-sector employees who are relatively high earners.

“It’s clear that the majority of workers in the private sector, who are low-wage earners, will not receive a single cent in terms of CoLA,” Spanos said, asking whether this was fair.

“In a bid to avoid political cost, governments often end up creating a social cost,” he added.

The €1.2 billion could have gone into funding ‘social projects’, he argued.

Spanos recalled that in the past he had suggested the automatic payment of CoLA, not horizontally, but rather to those on low wages – specifically to people whose earnings are under the median wage of €1,573.

“In my humble opinion,” he went on, “given the state of public finances, CoLA should have been paid automatically to all those under the median wage. This could also apply to the private sector.

“About half a million people have needs, and the state should not profligately spend €1.2 billion on workers who have less needs.”

Marios Clerides, also an economist, called for a meaningful rethinking of the issue.

He said that whereas some workers are shielded from the effects of inflation, “we need to see how some others who don’t enjoy CoLA will pay the cost, and that includes businesses.”

Employers organisations grudgingly agreed to payment of two-thirds of CoLA, even though they said they vehemently disagreed with the allowance in principle.

In a statement at the time, the Federation of Employers and Industrialists said it sees the allowance as “an obsolete system that feeds into inflation, widens the wage gap between high earners and low earners, disproportionately affects production costs, undermines businesses’ competitiveness, harms exports and erodes the economy as a whole.”