Cyprus is facing high risks concerning the sustainability of its public finances, along with Spain, says the annual Fiscal Sustainability Report 2012, issued by the European Commission.
The report notes that the problems in both countries were exacerbated by problems in their respective financial sectors.
The annual report, presented by Economic and Monetary Affairs Commissioner Olli Rehn, does not refer to Greece, Ireland or Portugal, since the sustainability of the three countries’ public finances is part of their adjustment programs.
Rehn made a particular reference to Cyprus and Spain, noting that the situation in both countries was exacerbated since the Commission’s previous report on their macroeconomic imbalances.
The report also notes that short term risks have abated for all countries, but Cyprus and Spain, excluding the three countries implementing austerity programs.
Fiscal adjustment measures adopted in Spain are expected to lower risks in the short term, the report writes. To the contrary, the European Commission notes that Cyprus faces high risks in the short term, due to the aging population and the rise in public spending, expected to reach 8.9% of the GDP in the 2010-2060 period. The EU average is 2.9%.
The report notes that government debt is 71.1% of GDP in 2011 and is expected to rise to
102.7% in 2014. It is added that risks would be higher in the event of the structural primary balance reverting to lower values observed in the past, such as the average for the period 1998-2012.
Moreover, it is added that the focus should be on resolutely continuing to implement
sustainability-enhancing measures that avert potential risks to fiscal sustainability from
materializing or intensifying in the short term.
In addition, the report says that further containing age-related expenditure growth, including through pension reform, appears necessary to contribute to the sustainability of public finances in the long term.
Furthermore, Cyprus needs to implement long-term sustainability enhancing policies equivalent to a permanent improvement of 8.2 percentage points of GDP in the structural primary balance to close the fiscal gap. This effort, it is added, is substantially above the average improvement required for the EU as a whole (2.7 pp).
If there is no change in policy, the report says that debt will increase from 102.7% of GDP in 2014 to 127.4% in 2020 and to 171.8% in 2030.
