Cyprus could up its spending cap if it convinces Brussels that the models the latter uses systematically ‘downgrade’ the island’s economic indices, the head of the Fiscal Council asserted on Monday.
Michalis Persianis told MPs that the economic models used for Cyprus by the European Commission exhibit a ‘systematic bias’ towards the island. This in turn affects the expenditures for Cyprus allocated at the EU level.
Persianis said the Fiscal Council ran a complex statistical analysis which revealed a disparity between the various models used to analyse the Cyprus economy. The analysis showed a divergence, for instance, between the models employed by the Cypriot finance ministry, the Central Bank of Cyprus, the International Monetary Fund and the European Commission.
Brussels’ model produces a divergence of approximately 1 per cent lower compared to the other models. This impacts – downward – the spending cap assigned to Cyprus.
These findings, said Persianis, could give Nicosia the “ammunition” to seek a higher spending ceiling – but it still has to convince the European Commission.
“The differential persistently generated by the Commission’s models is something we’ve suspected for some time…but now with the statistical analysis we have the proof,” Persianis later explained to the Cyprus Mail.
The economic model used by the EU factors in GDP, inflation, the unemployment rate and the current account balance of member states. However GDP is the index with the most weighting.
Under new EU rules to ensure debt sustainability of individual member states, net primary spending of countries over a certain period (four years) must not exceed a certain threshold.
The current period is 2024-2028. Net primary spending is expenditure excluding discretionary revenue measures, interest expenditure and national expenditure on co-financing of programmes funded by the EU.
For 2024-2028, under the model used by the European Commission, Cyprus can increase its net primary spending by up to 4.925 per cent, said Persianis.
But if GDP is ‘corrected’ to a higher value, this in turn would lower the debt-to-GDP ratio and thus allow Cyprus to raise its net primary spending cap.
“The EU tends to understate growth in Cyprus,” Persianis told us. “If the government convinces them that our GDP is actually higher than what they calculate, that might allow us to spend more.”
The new EU economic governance framework entered into force in April 2024.
Essentially the new framework introduced a more flexible, country-specific approach to fiscal policy, with the aim of balancing budgetary constraints with substantial investments. It is a shift from a rigid rule-based system to a tailored, economic analysis-based model.
In the wake of the Covid-19 pandemic, the energy crisis, and Russia’s invasion of Ukraine, and in a bid to ease the financial burden of these challenges, the European Commission suspended the Stability and Growth Pact (SGP) rules for 2020–2023, allowing member states to exceed the 3 per cent deficit-to-GDP threshold and increase public spending to mitigate the crisis’ severe impacts.
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