Commission assesses Cyprus’ stability programme

Cyprus should restrain public expenditure, reform the pension system and enforce health care reforms to improve the sustainability of its public finances in the long run, the European Commission has said, in its evaluation of the stability programmes of Austria, Cyprus, Malta, Portugal and Slovenia.
“Cyprus has achieved a remarkable consolidation in the past few years which resulted in a budgetary surplus in 2007 and a debt reduced to 60% of GDP. However, it should learn from past mistakes and restrain public expenditure, reform the pension system and enforce the health care reforms to improve the sustainability of its public finances in the long run”, the EC says.
It notes that in 2007 both Cyprus and Slovenia reached the medium-term objective (MTO) for their public finances: a balanced budget in Cyprus’ case and a deficit of 1% of GDP in structural terms in Slovenia’s.
The two countries should also be able to maintain sound budgetary positions throughout their programme periods, a Commission press release says.
With regard to the long-term sustainability of their public finances, Portugal and Malta are at medium risk, while Cyprus and Slovenia are at high risk. Only Austria is considered to be at low risk.
The Commission says that Cyprus’ overall budgetary strategy should be sufficient to maintain a sound budgetary position and macroeconomic stability throughout the period 2007 – 2011.
“Cyprus has set itself an MTO of a balanced position in structural terms. This is more ambitious than in the previous programme (-0.5%) and was already surpassed in 2007 thanks to an unexpected increase in total revenues by over 3 percentage points of GDP The programme projects a return to historical tax trends in the coming years”, it adds.
According to the Commission, although the planned reduction of the general government surpluses in 2008 and 2009 reflects this normalisation of tax revenues, and the outcomes may be better than expected, there is a risk that the budgetary stance in 2008 may turn out to be pro-cyclical.
“Thereafter, achievement of the budgetary targets will depend on the economic growth projections being met, which appears fairly likely at this stage,” he said.
The Cypriot debt is also expected to have reached 60% of GDP in 2007 and to rapidly fall to 40% in 2011 from 70% in 2004.
“This is a welcome step since the long-term sustainability of the Cypriot public finances is at high risk on account of the projected increase in age-related spending”, it points out.