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Our View: VAT cuts are not so temporary

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When a government introduces a temporary measure, aimed at offering relief to people, its eventual revocation is certain to spark opposition. There will be demands for keeping the measure in force for longer, even if economic conditions might not justify this. Governments, therefore, are very reluctant to introduce temporary tax cuts because there is the danger it will have difficulty in ending them.

This is exactly what has happened to the government with regard to the VAT cuts to car fuel and electricity bills introduced by its predecessor to help people cope with the surge in prices, made worse by the war in Ukraine. With the EU Commission giving the green light to such temporary measures, the previous government introduced the cuts last July for three-month periods and extending them repeatedly. The new government extended the period of the cuts until the end of June.

When it was announced this week that the cuts would end at the end of June, inevitably there was a reaction from the opposition parties, Akel and Disy. Akel said ending the cuts was a “blatant provocation for the whole of society,” that “added to the burden on households and businesses that are on their knees because of the high prices.” It also said that while fuel and electricity prices had fallen, interest rates and housing costs were still rising – as if this justified keeping the VAT cuts in place.

Disy’s arguments were along the same lines. It also pointed out that the budget surplus for the first quarter of the year was the same as it was in for the same quarter of 2022, when there were no cuts; it also said that the European Commission allows such measures to stay in force until the end of the year. Like Akel, Disy believes the VAT cuts should stay in place, even though the price of electricity and fuel had fallen, so as to help households deal with high prices of other goods.

This is not a rational economic argument. By the same reasoning, they should argue that the state should cut the rate of income tax to help people cope. More importantly the VAT cuts are regressive as the biggest beneficiaries are the people with big houses and powerful, petrol-guzzling cars. Untargeted measures benefit the well off much more than those from low-income groups.

The political pressure from the opposition parties, however, has forced the government to have second thoughts. Thursday’s council of ministers’ meeting, which was supposed to end the VAT cuts at the end of the month decided to consider the matter further. Government spokesman Constantinos Letymbiotis, said the government was examining whether the reasons for taking the temporary measures still existed, also paying lip service to fiscal prudence.

Is the government preparing to bow to opposition pressure? Probably, because it knows that the reasons for the VAT cuts in fuel and electricity no longer exist.

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