Cyprus forecasts deficits in 2009-12 Stability Programme

The Cyprus government submitted the Stability Programme 2008-2012 (SP) to the European Commission, the main feature of which is that after several years of running surpluses, the government is now forecasting that the budget will be in deficit. 

According to the SP, the government aims to promote growth and strengthen social cohesion (via redirecting resources in favour of social expenditure and growth-enhancing expenditure) as well as to lower public debt compared to GDP over the medium term thus allowing for more flexibility in fiscal policy making. 

Fiscal policy strategy is to continue consolidating public finances aiming to reduce public debt with emphasis placed on the need to curtail current expenditure and restructure public spending. Emphasis is also placed on targeted social spending i.e. redirecting resources towards infrastructure. 

The basic scenario presented in the SP calls for real GDP of 2.1% in 2009 and 2.4% in 2010 with recovery gathering pace in 2011-12. From the demand side of things, private consumption growth is expected to slow considerably from 7.2% in 2008 to 3.8%. Investment activity is expected to slow down due to deterioration in construction activity. In particular investment in buildings is expected to contract from 1.2% in 2008 to -6.9% in 2009, whilst total investment growth is expected to exhibit a smaller contraction.