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The August business confidence index as compiled by the University of Cyprus saw its sixth successive retreat, due mainly to the Vassiliko explosion and the inability of the government to properly deal with the crisis that ensued.
Although the mood among consumers is still subdued, it was the falling confidence within the services sector that raised concerns, as the sector is now the driving force of the crippled economy. This is in contrast to the gradual rise that the index had recorded last year, with indications that the economy would scrape through the crisis gripping the world and our services sector with tourism, shipping and financial services helping sentiment and output to recover.
However, needless to say that we are in much more grave situation and few people realise that sacrifices need to be made. Ironically, despite the initial rebellious language from the civil service trade unions, they have backed down from threats and may have accepted the short-to-medium remedies that involves some wage cutbacks. By the end of the month we should have a better picture of what the Finance Minister and the President have promised the unions in exchange for their little sacrifices and how much the second part of the austerity measures will cost us, the taxpayers.
What is important here is to restore confidence in the economy; confidence in government institutions and the current administration have reached their lowest ebb and there is no possibility of reviving them any time soon.
Higher taxation is never a solution when trying to encourage development (which will, in turn, encourage investments, hiring, new start-ups and eventually revenues for the state.) If we limit this to the measures already announced and a short-term hike in VAT, then this is doable.
The proposals put forth by the civil servants’ union to crack down on tax evaders is also worth following through, as long as such actions avoid unwarranted people meddling in the private financial affairs of middle-income individuals and small companies.
In the long run, with the gas drilling expected to start in October and the increase in arrivals from Russia to invest in our services and real estate (if, in the meantime they don’t pull out their deposits) confidence ought to be restored in the market. But the government must maintain its path of cost-cutting and in the long term, as the pensions scheme is reformed, so should the gap in income levels between public sector employees and private sector workers. But in order to do that, we need to encourage development.
So, the vicious circle starts now, here.
