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Our View: Finance minister needs to put sensitivities aside

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Finance Minister Makis Keravnos

Finance minister Makis Keravnos was disparaged and ridiculed for the measures he announced after Wednesday’s council of ministers meeting, one newspaper columnist referring to them as “targeted mockery.” He was referring to the minister’s oft-repeated message about the government’s preference for ‘targeted measures,’ that are supposed to support vulnerable households, but which have never materialised.

On Wednesday Keravnos announced that the period of zero VAT for a selection of essential goods, which was due to expire at the end of October, would be extended by six months. To this list, he said, the government decided to add coffee and sugar, provoking even more ridicule, before reminding journalists that this was a “human-centric” government “showing its sensitivities.” This was not all.

“And we are following all the developments, with great seriousness and great sensitivity and depending on the developments, the government will carry on placing measures helping all those in need.” The truth is that a finance minister that approaches economic issues with sensitivity rather than cold-hearted logic, is totally lacking in seriousness and credibility. Could anyone trust such a finance minister to take a necessary, unpopular decision, or would he choose to protect the government’s message of human-centric values instead?

Not surprisingly, this vacuous rhetoric is not even an accurate reflection of government actions. The second measure Keravnos announced on Wednesday was not targeted, it lacked the government’s trademark sensitivity and, most certainly, did not help anyone in need. The government decided to reduce the defence levy on interest earnings from 30 per cent to 17 per cent. The cost to the taxpayer, the minister said, would be €16 million and the government decision “is aimed at increasing the income of middle(sic) households and middle(sic) businesses that have deposits.”

This is a targeted measure helping those with a lot of money in the bank, the very people that do not need any assistance from the state, even if the 30 per cent levy was excessive and should have been reduced. People who will see their income increase by the reduction of the defence levy to 17 per cent must have very big bank deposits and it was disingenuous of Keravnos to suggest the measure would help “middle households.” If he was referring to ‘middle-income’ households, how did he know that these have bank deposits so big they would benefit from the reduction of the levy on interest rate earnings?

The finance minister tried to justify the decision with a totally absurd argument. “At a time when interest rates on deposits remain stuck, we are sending a message, by increasing the available income of depositors and I hope the government will open the way for others to follow.” Was the government wasting the taxpayer’s money to increase bank depositors’ earnings, because the banks were refusing to raise interest rates on deposits? Is the state helping out the banks which are set to make record profits this year? Is he seriously suggesting that this idiotic decision will make the banks increase deposit rates, because they will feel ashamed?

These are the banks that have ignored the minister’s public and private exhortations to raise deposit rates. The same banks that have resolutely refused the minister’s public pleas to absorb part of the interest rate increase, because they know they have the full backing of the ECB, which supervises them and to which, ultimately, they are answerable. Interest rates were raised again on Thursday – to four per cent – by the ECB, because it is following a monetary policy aimed at tackling inflation in the euro zone. High interest rates mean contracting demand and less upward pressure on prices. If deposit rates were increased people would, admittedly, spend less but bank loan rates would also rise, putting even more pressure on borrowers.

We cannot believe that the finance minister is unaware of these basic rules of economics. We can only speculate that he is pursuing the government’s communications policy, diverting criticism away from the government by putting pressure on the banks and talking about “sensitivity” and “human-centric” values. These empty claims should be left to other members of the government to make, because business confidence, to an extent, relies on having a pragmatic finance minister that puts the interests of the economy above popular sentiment.

Despite the mixed messages, the government has steadfastly refused to bow to pressure for horizontal measures such as re-introducing the electricity bill subsidy and tax cut on fuel. And so, it should, for the good of public finances, considering the public payroll was up by ten per cent and social benefits by 11 per cent in the first six months of this year, compared to the corresponding period of 2022. It cannot afford any horizontal measures, something President Christodoulides alluded to, in his speech at the PWC conference in Limassol on Friday.

This should be made clear by Keravnos at every opportunity, even if it will make him unpopular. It is better to be unpopular and command trust than talking about sensitivities and shattering your credibility as a finance minister.

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