Cyprus eyes VAT hike to 16% to plug fiscal gap

Cyprus could increase value added tax in an attempt to keep a lid on its inflated deficit and meet EU commitments to incrementally cut it, Finance Minister Charilaos Stavrakis said on Thursday.
An increase in VAT, now at 15%, is one of the options floated by the government as part of a package to reduce the budget deficit to 4.5% in 2011 from an estimated 6.0% this year, he said.
"That too is a possible measure," Stavrakis said, when asked if a fiscal consolidation package included raising the rate. There have been persistent rumours that the government is mulling a percentage point increase in VAT to 16%.
Stavrakis has previously spoken of the likelihood of raising corporate taxes and taxing banks in a bid to plug the shortfall next year.
As a draft 2011 budget now stands, the island faces a deficit of 5.4% next year, falling short of its EU pledge to cut it to 4.5% under an excessive deficit procedure. In cash terms, it is a 150 mln euro shortfall.
Any tax decision must be approved by Cyprus's parliament, which had earlier this year thrown out proposals by the government to increase corporate tax by one percentage point to 11%. The island has a presidential system of government.
In an attempt to reach a consensus, a new fiscal plan has been submitted to political parties in parliament which is now being debated.
With parliamentary elections scheduled for May, politicians will have a difficult balancing act of meeting EU committments, or taking what are likely to be unpopular tax steps.
"We deliberately drew up a wide list of options, more than what is required.. to allow political parties to make their own choices," Stavrakis told journalists after briefing MPs.
Cyprus emerged from its first recession in more than three decades in the first quarter of this year, after recording an economic contraction of 1.7% in 2009. Stavrakis said the recovery was set to continue.
"The indications are it will gather pace in the second half of the year and in 2011," he said.