Our View: The dangers of economic policy by public demand

In the last few months, the government has come under intense pressure from political parties, unions, consumer groups and media to announce measures for helping households cope with the steadily rising cost of living. Opposition parties regularly called for action, while newspapers carried scathing attacks against the government’s failure to introduce measures “against expensiveness” to help people.

This was always going to be a test of government resolve, as both President Nikos Christodoulides and Finance Minister Makis Keravnos repeatedly took a public position against horizontal measures, persistently putting across the case for targeted measures that would help vulnerable members of society. In the end, the government failed the test, the president bowing to public pressure and announcing horizontal measures on Thursday, despite his oft-repeated opposition to them.

A month ago, on the sidelines of a business conference in Limassol, when asked about the re-introduction of the state subsidy on electricity bills and the reduction of the tax on fuel, Christodoulides said: “We have seen in the very recent past in this country where the mismanagement of public finances led us and I don’t think anyone, not even the parties, even more so the Cypriot people – because I am accountable to the Cypriot people – want us to return to the kind of conditions that led us to wrong economic policies.”

On the same day, he stressed the importance of fiscal discipline and indicated the government would adopt a ‘wait and see’ approach, saying “we have a responsibility to look ahead, to see how things develop, after three months and six months,” before new measures were taken. This was because, as he explained, the global economy was in a state of turmoil, while geopolitical tensions were casting a shadow of uncertainty over international trade and cooperation, impacting supply chains and investment.

Keravnos took a similar line, saying measures could be announced after the state budget was approved, something that usually takes place in December. A couple of months ago, the minister also ruled out horizontal measures, insisting that targeted measures was the only way forward, only to change tune more recently, saying the government could consider the subsidy on electricity bills.

The president could not wait three months to see how things developed. Five weeks after he said the government would see how things developed after three and six months, he announced measures that were not targeted but across the board. And this, at a time when an even darker shadow has been cast over the global economy by the war in Israel. If the global economy was in turmoil and geopolitical tensions causing uncertainty five weeks ago, today the situation is much worse. So why has the president rushed to announce measures in such a period?

We suspect that he could no longer take the pressure applied on the government and gave in, ignoring the fact that the horizontal measures would not tackle expensiveness, but increase the rate of inflation. A day earlier, on Wednesday, in an interview with the Cyprus News Agency, governor of the Central Bank Constantinos Herodotou warned that fiscal policy “should not feature horizontal measures that are inflationary.” He stressed that “horizontal measures which touch the whole population, even those that do not need them, are inflationary.”

Perhaps the president’s grasp of economics is limited, but should Keravnos and the economists at the finance ministry not have warned him about the inflationary effect of horizontal measures? He adopted instead, the inflationary measures proposed to him by a coalition of the big union bosses, who are under the illusion that high prices could be tackled by increasing wages and disposable incomes. We should worry when the economic advice of union bosses and the populist parties is preferred to that of the Central Bank governor.

The total cost of the horizontal measures will be close to €130 million, even though €30 million will go to the photovoltaic subsidy scheme which will come from the resilience and recovery fund. Another €60 million will fund the housing schemes also announced on Thursday. The government had also come under attack for not having a housing policy, at a time when rents were rising and housing loans had become unaffordable because of the high interest rates.

With the measures, Christodoulides hopes to silence his critics, but, in effect, this is a show of great weakness and total lack of resolve in backing what he believed, until a week ago, to be in the best interest of the economy and public finances. This is economic policy by public demand, a policy that might silence his critics but will fuel inflation and increase inequality because it is the vulnerable, low-income groups that suffer the most from a constantly rising cost of living. Inflation does not make a dent in the disposable income of the well-off.

All the parties and unions welcomed the measures, which start next month, but the government spectacularly failed the test of its resolve, cracking under the public pressure and abandoning the economic policy it considered in the best interest of the country. Economic policy by public demand is a very dangerous to path to follow.