Cut “excessive” deficit, reform pensions and health, EC tells Cyprus

Cyprus should take additional measures to reduce government spending and reform the health and pensions sectors in order to meet a national stability programme and for the economy to return to a path of growth, the European Commission said on Wednesday in its annual economic recommendations to all 27 member states.
The European Union’s ruling body said that the objective was to achieve a balanced budget by correcting the excessive deficit by 2012 and reaching the medium-term budgetary objective (MTO) by 2014, and to stay at MTO in 2015.
In its conclusions, the Commission said that Cyprus should “take additional measures to achieve a durable correction of the excessive deficit in 2012, improve tax compliance and fight against tax evasion.”
It said Cyprus needs to improve competitiveness through the reform of the system of wage indexation to better reflect productivity developments, take steps to diversify the structure of the economy and redress the fiscal balance by restraining expenditure.
In a mildly-worded criticism of the reasons leading to and handling of the banking crisis, the Commission said that Cyprus ought to “harmonise the supervision of the cooperative credit societies (Coops) in line with the standards applied for the commercial banks and strengthen regulatory provisions for the efficient recapitalisation of the financial institutions in order to limit exposure of the financial sector to external shocks.”
However, trade unions will be upset with the recommendation that Cyprus should “align the statutory retirement age with the increase in life expectancy,” as many of them oppose raising the retirement age, especially in civil service, considering that Cyprus is eight months away from the next presidential elections.
The Commission called for a need to further improve the long-term sustainability and adequacy of the pensions system and address the high at-risk-of-poverty rate for the elderly.
One of the biggest stumbling blocks has been a universal national health system and the reform of the hospitals, an issue that continues to drag its feet in government and parliamentary debates.
The Commission said the national healthcare system should be completed and implemented “without delay”, on the basis of a roadmap, which should ensure its financial sustainability while providing universal coverage.
On the issue of labour and entrepreneurship, the Commission recommends that Cyprus improve the skills of the workforce to encourage activities of high growth and high value added, address youth unemployment through work placements in companies and promotion of self-employment and stimulate business innovation.
Finally, the Commission recommends that Cyprus remove “unjustified obstacles” in services markets, in particular in areas with the most growth potential such as tourism, and by opening up the provision of professional services, for example legal, insurance and real estate.
In February, the Commission adopted the Alert Mechanism Report, in which it identified Cyprus as one of the member states for an in-depth review.
“Based on the (recalculated) structural deficit, the average annual fiscal effort planned at 1.5% of GDP for the period 2011-2012 is equal to the effort recommended by the Council. The envisaged progress towards the MTO in 2013 is sufficient as it is higher than the 0.5% of GDP benchmark of the Stability and Growth Pact both according to the Commission's 2012 spring forecast and the programme,” the report said.
“There are risks accompanying the budgetary targets of the programme linked to the macroeconomic scenario appearing optimistic in 2012-2014 and the planned consolidation effort in 2013, partly relying on not fully specified measures. According to the programme, the debt-to-GDP ratio, which amounted to 71.6% in 2011, is to increase to 72.1% in 2012 before gradually dropping to 65.4% in 2015. In terms of the debt reduction benchmark of the Stability and Growth Pact, Cyprus will be in a transition period in the years 2013-2015 and the plans presented in the programme would ensure sufficient progress towards compliance with the debt reduction benchmark. However, there are risks attached to this projection linked to the possible rescue operations of financial corporations.”