Our View: Government must listen to reason over relief measures

The answer to the barrage of criticism by opposition parties over the government’s decision not to extend the tax discount on fuel beyond last month was provided by the IMF, which was in Cyprus for 10 days last month to discuss prospects and risks for the economy as well as policy priorities. Although Finance Minister Makis Keravnos admitted on Friday that the government was under pressure from the IMF and the European Commission to end the ‘horizontal’ (across-the-board) measures, little else was said about the Fund’s findings.

This was probably because despite the many positive observations about the economy – its resilience, inflation rate close to 2 per cent, healthy growth prospects, budget surplus, robust banking system – the IMF was critical of the government’s ‘horizontal’ support measures, most of which were extended for a few months. It said authorities should resist extending its zero VAT measures, which were nevertheless extended by the council of ministers. It also specifically advised the end of the electricity bill subsidy, which was due to expire at the end of April, but has now been extended to the end of June.

Under the circumstances, it would have been difficult for the government to cite the IMF in answering the criticism of opposition parties considering it had ignored most of the advice about the measures. Keravnos suggested on Friday that the government’s measures were now targeted but this was not factually accurate. The electricity subsidy benefited 400,000 households and 100,000 businesses whereas the zero VAT on a range of basic goods is a horizontal measure, even though Keravnos argued that it was targeted at low earners.

The concern of the IMF, understandably, was that tax cuts aimed at protecting the purchasing power of wages at a time of inflation could negatively affect public finances if prolonged as well as undermine efforts to control inflation. This was why it was particularly critical of CoLA, saying the indexing adjustment of wages, particularly in the public sector, should be avoided and that there should be no more upward adjustments. There are rational economic reasons for this, which this government has refused to accept. Apart from fueling inflation, CoLA also puts public finances under strain through a constantly rising public payroll.

The IMF clearly states that wages in the public sector should reflect macroeconomic developments and productivity increases but this has been said for decades without any government taking any notice. Keravnos has said consultants would be brought in to advise how to control the public payroll but whether this will happen or anyone would listen to advice if it does happen remains to be seen. Perhaps the government could say that CoLA is also targeted – at the best members of the workforce.