.
DR. JIM LEONTIADES
Cyprus International Institute of Management
It is difficult to understand the thinking of the public sector unions as regards the proposed strike action on Thursday. By any comparison with other countries and other sectors of the economy, the public sector in Cyprus has come off very well during this crisis.
The many programmes implemented in Greece, Portugal Ireland and others countries in crisis have largely been aimed at the public sector. In these countries there have been large-scale reductions in the public sector personnel, privatisation programmes and increases in the pension age.
Today, Cyprus has the highest public sector expenditure as a percentage of GDP of any Euro-zone country (15.4%). The two-year wage freeze in the proposed new budget would do little to change this situation. Public sector workers would still be secure in their jobs.
The end result is that the proposed budget will leave our public sector expenditure much the same as it is today. Meanwhile, in the private sector thousands of workers have lost their jobs, there have been major reductions in many salaries of 20-30% and more in some cases, many shops are closing.
The finance minister pointed out, correctly, that the public sector would have fared much worse if the EU had come here to impose its measures. He indicates that in such a case as many as 7,000 public sector workers would have been laid off. What is the thinking behind this statement? Is it possible that both the finance minister and the EU recognise that our public sector is vastly overstaffed?
GREEDY CAPITALISTS
The thrust of the proposed new budget is to finance the deficit largely through new taxes, the least preferred option as regards improvements in competitiveness. The “greedy capitalists” which figure so prominently in trade union mythology will share in the pain. Taxes on dividends have already been increased by 13%. The current proposals would increase them still further for a total of 33%. The damage to our reputation as a low tax country has been done. Some foreign firms have already indicated they are looking to leave.
Meanwhile, the public sector unions have done very well for their constituents. Yes, the union leaders may growl and groan about their “sacrifices” but deep down they know that their members will be secure in their high paying jobs for the duration of the crisis. In fact, many of those whose wages that have remained stable will experience an increase in real income. Those who wish to buy houses will find that their price has been reduced by 20-30% and more. Car prices are also lower and the economy is such that many stores offer discounts as soon as you step through the door.
COMPETITIVENESS AND THE BUDGET
The aim of the proposed budget measures is to narrow the Cyprus national deficit. Perhaps they will be successful. But is that the right aim? The current financial crisis is the result of financial mismanagement, mostly on the part of European governments. Unlike the USA where toxic mortgages were at the center of the crisis, the European situation was largely initiated by over borrowing by governments and a lack of competitiveness in the crisis countries.
The austerity programmes in Greece and the other crisis countries have been aimed at correcting this situation. Hence, the large-scale reductions in the public sector where much of the over-spending has been focused. The end result for them will hopefully be a restructuring of the economy, not only to reduce substantially their deficits but also to implement the sort of changes that will make their economies more competitive and productive. In short, eliminating the deficit is not the same as eliminating the competitiveness problem.
TWO MAJOR PROBLEMS
The IMF identified two major problems in Cyprus. The risk exposure of our banks and deterioration in our public finances, “in particular public sector wages and benefits”. Both share responsibility. But there are major differences. Drastic measures to improve the situation and particularly the risk exposure of the three major Cypriot banks are already in progress. New capital adequacy rules require them to raise many millions of euros of new capital to strengthen their reserves.
Toward the same aim, they are reducing and eliminating dividends, issuing new shares, and floating new bonds as well as converting old bonds. There are stricter limits on lending in an effort to reduce loans outstanding and improve their quality. New rules are in place which bring in the central bank as a “watchdog” over the banks. It is possible that this is still not enough and more will have to be done. Nevertheless, real changes are taking place which indicate that the banks will emerge from the crisis stronger and in a better position to compete.
We do not see similar changes in the public sector. The public sector wage freeze will help in the short term – but two years is a very short time as these things go. The proposed budget will hopefully “rescue” Cyprus but it will not improve our competitiveness.
