It hurts the economy, society and the environment

Under the democratic system of Cyprus the executive and legislative branches of government are elected by the people to serve the people. But many individuals in democratic countries seek political office to gain personal power and enrichment. What is most worrisome is that the actions of Cyprus government and its administration go beyond those in most European countries in enabling the ruling elite and their business collaborators to accumulate wealth and power at the expense of the wellbeing of most citizens.

Cyprus politicians appear to give priority to serving themselves first rather than managing the economy’s resources and government finances for the good of the nation. The tax system is designed and administered in ways to disproportionately benefit the ruling political and business elite. Government expenditures are allocated giving priority to rewarding certain sections of the population, such as politicians and public sector employees, with little concern about redressing inequalities and imbalances in the economy. Furthermore, the questionable selection of law officials by politicians and their unsavoury influence on them has resulted in a deterioration of law and order in Cyprus leading to much corruption and greater inefficiency in the allocation of resources as well as damage to the environment.

Despite these important shortcomings in governance, the ruling elite have maintained their popularity in part by advertising their “success” in managing the economy by regularly citing figures on the positive rate of growth of real GDP and the recording of surpluses in the accounts of the government.

Quality of economic growth

As has been argued in previous opinion pieces it is the quality of economic growth that matters – whether the gains in GDP are benefiting most citizens through achieving equitable growth and whether economic growth is balanced and sustainable. It has been further contended that relatively rapid GDP growth in Cyprus over recent years has not significantly benefitted a large number of citizens with many private sector employees suffering from low incomes and high indebtedness and the younger generation experiencing increasing problems in affording decent housing and in raising a family. Indeed, mounting inequality is reflected in the estimate that the wealthiest 10 per cent of households in Cyprus own over 60 per cent of the net wealth comprising physical property and financial assets less debt.

The government’s obsession with producing and advertising its fiscal surpluses in contending that it is managing the government finances well is misleading and in most years is hampering equitable growth. More specifically, through its macro policy of implementing fiscal austerity and producing surpluses the government is taking money out of the economy when many citizens and businesses are suffering from higher prices and costs. Indeed, the economy is being kept afloat by buoyant cash receipts from tourists and sales of property to foreigners, resulting for the time being in strong external demand more than offsetting feeble domestic demand.

It is the quality of the government finances that matters as well – whether the government is raising enough revenue, both fairly and efficiently, to finance high levels of quality public expenditure on infrastructure, education, healthcare, technology and social protection in order to be a country with widespread prosperity.

But the quality of government finances in Cyprus is marred in part by a tax system that is grossly unfair, narrowly based, and inefficient and fails to produce sufficient revenue compatible with financing the quality government expenditures of an advanced European state.

Since the abolition of the central government tax on immovable property in 2016 little revenue has been derived from the taxation of wealth. And together with the turning of an official blind eye to tax evasion the tax system has been stealthily manufactured by politicians to favour the ruling and business elite.

In consequence, with the rich and powerful not paying their fair share of taxes owing to relatively low tax rates on personal incomes and hardly incurring any taxes on wealth as well as their prolific tax evasion, income and wealth inequalities are exacerbated. In addition, it is the lower and middle-income households paying regressive VAT and excise taxes on their consumer purchases that unfairly provide a large part of the tax revenue in Cyprus.

It can’t be overstated that the crime of tax evasion, greatly and even deliberately facilitated by poor tax administration, cheats the government out of revenue that could be used for productive investments and in assisting lower-income households and the vulnerable.

In view of their own financial interests, the Cyprus authorities have shown an extreme reluctance to take measures to reform the tax system in order to raise tax receipts. Even when revenue resources are severely strained and there is the prospect that government is unlikely to achieve its target for the budgetary balance, the government has been very unwilling to take measures to raise tax revenues. Rather as indicated below the government prefers to cut back on its capital and social expenditures. And, furthermore, in situations when the ability to reduce expenditures has been exhausted, the government has opted to borrow rather than raise taxes.

The composition of government spending reflects the government’s priority in maintaining and increasing its high level of current expenditures, especially through continually boosting its army of well-paid public servants for political purposes. Expenditure needed for economic development, environmental protection and assisting the vulnerable are given a much lower priority by politicians. Indeed, when budgetary resources are strained, outlays on very low capital and soft infrastructure expenditures are severely cut back.

In fact, government capital expenditure in 2022 of €943 million or a pitiful 3.5 per cent of GDP was still below levels of such expenditure in the years before the 2012/13 financial crisis. In sharp contrast government current expenditure has increased by 30 per cent since 2011 to reach €9.608 million or 35.6 per cent of GDP.

Under-investment by the government not only reflects priorities such as promoting private investments in the property sector directed at attracting foreign tourists and investors, but is attributable also to the deteriorating institutional capacity to implement productive investment projects and programmes.

However, institutional capacity in turn largely reflects the level of competence of managers and employees in the public sector. In this connection the quality of the government workforce has declined markedly over the last decade as more persons have been employed for political purposes rather than on their ability to adequately serve the public. Indeed, casual workers, which represented 22 per cent of government employees in 2011, have had their number more than double over the following 12 years and now account for around 44 per cent of total government employees, while the number of the more skilled permanent workers fell by over 25 per cent during this period.

In addition, the poor quality of expenditures, on education, low investment in the digital transformation, and small outlays on research and development (just 0.8 per cent of GDP compared with EU average of 2.3 per cent) means that the Cyprus government is not investing sufficiently in skills and infrastructure to take advantage of advanced technologies and in turn create better jobs for the younger generation.

Politicians through their influence in extending privileges such as tax breaks and awarding of public works contracts as well in the biased application of laws and regulations favouring the ruling and business elite not only corrupt the capitalist system, through distorting genuine competition and preventing efficient resource allocation, but tarnish the reputation of Cyprus for potential investors. Most notably, the unsavoury and corrupt application of the golden passport scheme allowing politicians and politically connected professionals and property developers to extract large financial gains has damaged Cyprus as a sound place for investment by foreign entities, inhibiting the potential for the future balanced development of the Cyprus economy.

Furthermore, the violation of environmental regulations by property developers and hoteliers, the rezoning of nature areas such as on the Akamas peninsula to allow the building of commercial establishments, and the failure to penalise waste management companies that inadequately dispose of waste, all reflect the support and power of politicians and corrupt government connected officials that prioritise financial gains over protecting the environment.

Leslie G Manison is an economist and financial analyst. He is a former senior economist at the International Monetary Fund and an ex-advisor in the Cyprus finance ministry and at the Central Bank of Cyprus