The Cyprus government plans to hike VAT by two percentage points and increase a handful of other taxes as part of a watered down austerity package which aims to raise 600 mln euros, that may find resistance in parliament as it does little to reduce public spending and cut down on a bloated civil service.
Finance Minister Kikis Kazamias told the House Finance Committee on Wednesday in his first appearance since the cabinet was reshuffled five days ago, that the new measures include raising value added tax from 15% to 17%, raising income tax for those earning 60,000 euros a year from 30% to 35%, and a higher tax on bank deposits interest, currently at 10% to possibly 15%.
Civil servants will receive no pay increase for the next three years, and newcomers will face a lower entry-level pay scale as well as higher social contributions, Kazamias added.
"With the amount expected to flow in thanks to the adoption of the measures we propose in this first package, which is around 600 mln euros … the public deficit for 2012 is set at 2.5%," he said.
Analysts believe that the measures are not enough and this figure is not achievable if civil servants do not make greater sacrifices, considering the 3 bln euro cost of the damage from a munitions blast on July 11 that devastated the island’s main power station and plunged the economy into darkness with daily supply cuts.
Economist Fiona Mullen predicted that with no measures or half measures the budget deficit could shoot to 9% of GDP by the end of the year.
Already, the opposition Democratic Rally (Disy) had warned that it would only accept some taxation if these were part of a wider package of cuts within the civil service, something the current communist administration is fearful of doing.
The former coalition partner Democratic Party (Diko) has said that it may even oppose the bill in the parliamentary vote on Thursday.
The Chamber of Commerce (KEVE) and the Employers Industrialists Federation (OEV) issued a joint statement saying that the measures agreed to between President Christofias and the trade unions were wrong, as these backtracked on another package agreed with political parties on July 15.
“It is clear that the government is not willing to resolve the core issues of the public payroll and state pensions,” the two employer organisations said.
Civil servants have agreed to contribute 3% of their pay over three years, while maintaining their pay increase scales and a cost of living allowance (COLA), which together will earn government employees 18% more, KEVE and OEV said, adding that 30,000 workers in the private sector are unemployed while thousands more have agreed to pay freezes in order to secure their jobs.
Civil servants enjoy a basketful of privileges which they are note prepared to give up easily, such as lower contributions to the Social Insurance Fund, free government services, free medical care, education subsidies and others which private sector employees could only dream of, regardless if they are high or low-income earners.
“The 80% of the workforce can no longer continue to support the privileges enjoyed by the 20% in the public sector,” the employer organisations said.
The island's central bank and its largest lender warned that Cyprus must take action swiftly or risk bankruptcy and become the next euro zone country needing a bailout.
Eurozone watchers are not concerned about the weight of the bailout, as the Cyprus economy with a GDP of 17.4 bln euros accounts for a mere 0.2% of the eurozone, but are worried about the contagion effect and the single currency’s reputation.
The island’s gross financing needs are estimated at roughly 2 bln euros for 2011, with the government seeking to roll over some of its debt in January and February 2012. If it fails, it will be politically and economically embarrassing as it takes over the presidency of the European Council on July 1, leading up to presidential elections in February 2013.
Cypriot banks could also take a hit of more than 1 bln euros to shoulder their Greek bailout obligations, forcing them to raise capital and potentially deepening concerns over the island's own sovereign debt.
Marfin Popular Bank had 18.7 bln euros of loans to Greece at the end of 2010 and Bank of Cyprus had 11.2 bln euros. The risk is that those loans will sour as Greece's austerity plan bites, a Reuters report suggested.
A bailout could also damage Cyprus's reputation and see the withdrawal of some of the 27 bln euros it has in overseas deposits, with much historically coming from Russia.
Those overseas deposits leave its banks well funded, with 71 bln euros in deposits at the end of June, more than the 65 bln they lend, according to central bank data.
What Are Cookies
As is common practice with almost all professional websites, our site uses cookies, which are tiny files that are downloaded to your device, to improve your experience.
This document describes what information they gather, how we use it and why we sometimes need to store these cookies. We will also share how you can prevent these cookies from being stored however this may downgrade or ‘break’ certain elements of the sites functionality.
How We Use Cookies
We use cookies for a variety of reasons detailed below. Unfortunately, in most cases there are no industry standard options for disabling cookies without completely disabling the functionality and features they add to the site. It is recommended that you leave on all cookies if you are not sure whether you need them or not, in case they are used to provide a service that you use.
The types of cookies used on this website can be classified into one of three categories:
- Strictly Necessary Cookies. These are essential in order to enable you to use certain features of the website, such as submitting forms on the website.
- Functionality Cookies.These are used to allow the website to remember choices you make (such as your language) and provide enhanced features to improve your web experience.
- Analytical / Navigation Cookies. These cookies enable the site to function correctly and are used to gather information about how visitors use the site. This information is used to compile reports and help us to improve the site. Cookies gather information in anonymous form, including the number of visitors to the site, where visitors came from and the pages they viewed.
Disabling Cookies
You can prevent the setting of cookies by adjusting the settings on your browser (see your browser’s “Help” option on how to do this). Be aware that disabling cookies may affect the functionality of this and many other websites that you visit. Therefore, it is recommended that you do not disable cookies.
Third Party Cookies
In some special cases we also use cookies provided by trusted third parties. Our site uses [Google Analytics] which is one of the most widespread and trusted analytics solutions on the web for helping us to understand how you use the site and ways that we can improve your experience. These cookies may track things such as how long you spend on the site and the pages that you visit so that we can continue to produce engaging content. For more information on Google Analytics cookies, see the official Google Analytics page.
Google Analytics
Google Analytics is Google’s analytics tool that helps our website to understand how visitors engage with their properties. It may use a set of cookies to collect information and report website usage statistics without personally identifying individual visitors to Google. The main cookie used by Google Analytics is the ‘__ga’ cookie.
In addition to reporting website usage statistics, Google Analytics can also be used, together with some of the advertising cookies, to help show more relevant ads on Google properties (like Google Search) and across the web and to measure interactions with the ads Google shows.
Learn more about Analytics cookies and privacy information.
Use of IP Addresses. An IP address is a numeric code that identifies your device on the Internet. We might use your IP address and browser type to help analyze usage patterns and diagnose problems on this website and to improve the service we offer to you. But without additional information your IP address does not identify you as an individual.
Your Choice. When you accessed this website, our cookies were sent to your web browser and stored on your device. By using our website, you agree to the use of cookies and similar technologies.
More Information
Hopefully the above information has clarified things for you. As it was previously mentioned, if you are not sure whether you want to allow the cookies or not, it is usually safer to leave cookies enabled in case it interacts with one of the features you use on our site. However, if you are still looking for more information, then feel free to contact us via email at [email protected]