Cyprus needs to save €500 mln each year

 — No new taxes, but will stamp out tax evasion —

Cyprus Finance Minister Charilaos Stavrakis unveiled a fiscal package aimed at generating savings and additional revenue of EUR 500 mln a year to curtail growing deficits, but pledged that the government would not resort to new taxation. Instead, the onus will be on cost savings and new sources of revenue.
The package includes changing valuations used to tax real estate — unchanged since 1980, stamping out tax evasion and closer monitoring of a civil service payroll. Authorities will also pursue changes to pension contributions in the public sector and introduce cutbacks in the benefits system, Stavrakis said.
"The required savings and additional revenue (of the package) is EUR 500 mln annually to improve public finances," Stavrakis told reporters. The figure was equivalent to about 3% of GDP.
The proposals do not include any proposal to cut civil servants' salaries — which take a EUR 2 bln chunk out of an EUR 8 bln budget. However, Stavrakis said that at the end of the present Communist-led government's tenure, in 2013, authorities wanted the number of civil servants to be reduced by 1000.
Other than a modification in the real estate tax, there was no other taxation proposal. Cyprus has one of the lowest corporate tax rates in Europe of 10%, a key selling point in its bid to attract foreign investment.
Authorities expect the island's public deficit to hit 4.5% of GDP next year in the worst-case scenario of diminishing earnings. The European Commission expects the shortfall to be higher at 5.7% of GDP.
The island, representing 0.2% of the euro zone economy, slid into recession in the second quarter of 2009 on a slump in the real estate sector and declining earnings from tourism.
The European Commission expects Cyprus to return to 0.1% growth in 2010 after a forecast contraction of 0.7% in 2009.
Stavrakis said the previous tax amnesty netted EUR 4 bln but is confident that a renewed push to stamp out tax evasion, mainly among professionals such as doctors, lawyers and accountants will net EUR 100 mln annually.
The title deeds amnesty, seen as a one-off measure, is seen netting EUR 150 mln a year in 2010 and 2011.
Changing the year of property valuations from 1980 to 2008 on which all property taxes are based, will generate EUR 80-100 mln in additional revenue compared to the EUR 11.7 mln revenue generated in 2008.
The government also wants to reduce its generous social benefit package by 10% in order to achieve annual savings of EUR 100 mln on total EUR 1 bln spending.