Cyprus to hike VAT, corp tax; evades civil service cuts

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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.