And party politicking should have no role

By Loukis Skaliotis

Recently the Cyprus Mail was warning that the government budget was pushing the public sector wage bill to unsustainable highs. It was an observation that did not receive much commentary as the government publicity machine portrayed the budget as part of the government’s “sound policies” on the back of the recent upgrade of the Cyprus economy by the rating agencies.

However, the fact that overall government spending is restricted to bringing down the country’s debt to GDP ratio is not necessarily good economic policy. For sure, rating agencies love watching these statistics, and it is far more preferable to have a controlled budget rather than an uncontrolled one. The Akel government of Demetris Christofias painfully proved as much. Yet, how a government uses its expenditure is much more important than how much it spends. It is a distinction that is often missed in translation. For it is much easier to evaluate how much or less you spend than how you spend it. In this respect, the Cyprus Mail’s comments on the expanding public sector bill were spot on.

A more thorough analysis of the budget was given in the Cyprus Mail on December 22 by Les Manison a former senior economist at the IMF. He explained, among other things, that even though development expenditure (a key part of expenditure that could lead to future growth) was budgeted to increase by 4.4 per cent it is highly unlikely that this expenditure will materialise.

If you consider that in this amount, we include the grandiose plans for developing a defence industry in Cyprus it may be just as well. Back in 2022 the then government announced an economic plan called “Vision 2035”. It was a technocratic study (commissioned by the European Commission no less) that took a lot of time and money to prepare. It analysed various areas that needed improving and made concrete suggestions for implementation. (Curiously, the identification of a defence industry as a source of growth was not among its findings!). Unfortunately, it looks like we have a habit of undertaking expensive studies that will end up gathering dust in some drawer rather than being usefully utilised.

The institutional framework relating to the budget process needs to change to enable development plans that require longer time horizons to come into fruition and not be dependent on political short-termism. The old planning bureau with its semi-autonomous status used to play this role. Since its dissolution and amalgamation into the finance ministry the emphasis on development has gone.

In addition, the budget approval procedure where parliaments have the power to approve, change or reject the budget has made the exercise of an effective economic policy a mockery. Some people argue this power bestowed to parliaments is a fundamental part of the checks and balances on the executive branch. Yet, the separation of the legislative function from the executive function – paramount in a good democratic system – does not imply that the legislative body should have a say in the budget which is a purely executive exercise.

The system of having parliaments approve the government expenditure has its roots in 1689 England and the beginnings of modern democracy. During the Glorious Revolution and the ascendancy of William of Orange to the throne, the people who funded the Crown (the aristocracy in parliament those days) demanded that they had a say in how their money was spent. This was enshrined in the Bill of Rights, which remains a crucial statute in English constitutional law to this day. The Crown does not play the same role in today’s democracies, yet the legislature still retains this power to the detriment of having an effective elected government.

This inability to function as an effective government is part of the problem in modern democracies today. We have seen this in South Korea recently where the hapless president thought he could change the system by declaring martial law, or in France with the recent toppling of the Michel Barnier government and his replacement as prime minister. In the US, the Treasury Secretary Janet Yellen only last week implored Congress to raise the budget limit as the US government could face a default as early as January 23 unless extraordinary accounting measures are applied.

For sure, government executive policies need to come under scrutiny, but the budget is one area where expert independent analysis is required and should not be subject to party-political infighting. In the UK, where there is no presidential system of government, the independent Office of Budget responsibility (OBR) that was set up in 2010 plays this role. It does not have power to approve or reject the government budget but expresses an independent opinion on the soundness of the numbers and projections presented.

A government can take into account the comments made or not at its discretion. Liz Truss, the former UK prime minister, chose the latter approach in September 2022 and was swiftly punished by the financial markets leading to a mini economic crisis forcing her resignation. This is a much better way to exercise a check on the sensibility of a government’s economic policies than relying on horse trading by the political parties often on issues totally unrelated to the budget. I remind you of the threat to boycott the Cyprus budget in 2020 unless the then auditor-general was given access to the golden passport files.

Democracies are in crisis everywhere. There is a lack of faith that the system delivers for the people that it was meant to serve. This, contrary to a recent more optimistic Financial Times editorial, is seen in studies such as the Pew Research centre and in a more in-depth article in the Financial Times not to mention the message sent by the election of our own totally (by his own admission) inexperienced Fidias to the European Parliament.

Governments must become more effective to earn back the trust of the people. Bringing the budget setting process into the 21st century would be a good start.

Loukis Skaliotis is an economist