The European Commission has noted that Cyprus is conducting a sound fiscal policy and is making good progress towards its medium-term objective, but is in need of further reform in the areas of pensions and health care to deal with a budgetary impact from ageing that is among the highest in the EU.
“Cyprus is consolidating its public finances at a good pace and is expected to bring its public debt below the level of 60% of GDP, but more needs to be done to reform pension and health care in order to handle the budgetary impact of ageing,” said Economic and Monetary Affairs Commissioner Joaquín Almunia.
Cyprus submitted a new update of its convergence programme on 6 December 2006, covering the period 2006-2010.
Based on a plausible macroeconomic scenario, fiscal policy in Cyprus is geared towards achieving the medium-term objective (MTO) of a structural deficit (i.e. a cyclically-adjusted deficit net of one-off and other temporary measures) of 0.5% of GDP by 2008, and a balanced position in both nominal and structural terms by the end of the programme period. The general government deficit and gross debt are planned to decline to 0.1% and 46.1% of GDP respectively by 2010 (from 1.9% and 64.7% respectively in 2006).
Overall, fiscal policies are in line with the requirements of the Stability and Growth Pact. As the risks to the budgetary projections in the programme appear broadly balanced, the budgetary stance in the programme seems sufficient to ensure that the MTO is reached by 2008 and maintained thereafter, owing to expenditure restraint and in a context of strong growth prospects. The general government gross debt is foreseen to approach the 60% of GDP reference value by 2007 and to continue declining in the subsequent years. The budgetary costs of an ageing population are, however, projected to be so significant that Cyprus is at high risk as regards the long-term sustainability of public finances
In view, in particular, of the level of the debt and the projected increase in age-related expenditures, the Council is invited to recommend to Cyprus to control public pension expenditure and implement further reforms in the areas of pensions and health care in order to improve the long-term sustainability of its public finances.
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