Cyprus to slap 0.05% tax on deposits, eyes pension reform

 — “Civil servants’ bullying pays off – no wage cuts” —

The Cyprus government said it plans to tax bank deposits, create a bank stability fund and pursue pension reform in its bloated public sector to help beat down a deficit running above euro zone limits.
But the pro-labour communist administration stopped short of announcing cuts to its bloated public wage bill for fear of upsetting the powerful civil servants’ trade union.
The announcement confirms Wednesday’s lead story in the Financial Mirror that had reported talk of a 0.03 to 0.05% tax on bank deposits, as suggested by Central Bank Governor and ECB Council member Athanassios Orphanides, based on an existing Swedish model and one that Germany plans to introduce.
However, Orphanides and the 13-member Cyprus Bankers Association had wanted that all the money raised remain in a stability fund to help the island’s banking system, should it falter.
The island plans to impose a 0.05% levy on high bank deposits of more than 100,000 euros for a two-year period, increase taxes on foodstuffs and medication, and launch a dialogue to generate 35 mln euros in savings in its public sector, Finance Minister Charilaos Stavrakis told parliament on Thursday.
Facing a 6.0% of GDP budget deficit this year, Cyprus is under the EU excessive deficit procedure for running a shortfall twice the recommended level in the euro zone.
Thursday's package will push the deficit below the EU's recommended 4.5% next year, Stavrakis said, warning against any backsliding.
"As a government we will make every effort to take corrective measures. (But) inevitably, any failure to correct public finances with meaningful measures will lead to more painful measures in the immediate future."
Unveiling the measures after months of wrangling in the centre-left governing coalition, Thursday's budget contained no proposals for cuts in civil servants' salaries, which had previously been floated by the finance ministry, possibly because for fear of losing the parliamentary elections next May.
However, an earlier report in the Financial Mirror had also suggested that governments introducing spending cuts were more likely to win future elections, while those who hesitated were punished by the general voting public.
Stavrakis said the government would pursue a dialogue with labour unions to tighten public payroll spending and generate savings of 35 mln euros. Authorities would also launch a debate on pension reform in the broader public sector.
The euro zone's second smallest member employs some 55,000 civil servants for a population of around 800,000. Its payroll represents 30% of overall spending, while civil service pension contributions are an estimated 25% of its annual payroll.
An estimated 60 mln euros in earnings from the bank tax would be divided between the stability fund and the government — 35 mln to the government, and 25 mln to the fund, effectively reducing the viability of the stability fund to half.
"This levy is not expected to affect the appeal of Cyprus as a financial services centre, since this practice is adopted in most EU member states," Stavrakis said.
"It will also reduce any systemic risk in the sector, and of the economy in general," he said.
Standard and Poor's last month lowered Cyprus's sovereign credit rating a notch to A, citing the island's large banking system and exposure to debt-ridden Greece.