* Economist says reform will bring back lost money, MoA still “painful” *
Andreas Theophanous, a vocal economist who very often challenges the establishment, is calling for an immediate reduction in taxes in order to get the economy up and running again.
“The most important way to improve the indicators of private and public debt is to increase our GDP once again. And the only way to do that is by reforming the taxation system. Taxes must come down across the board,” said Professor Theophanous, head of the Centre of European International Studies at the University of Nicosia.
Presenting a review on the “Effective way to resolve non-performing loans” co-authored by Christophoros Christophorou and Kyriakos Georgiou, Theophanous said that loan holders cannot or are not willing to cover their loan payments.
“What happened in March 2013 was a tragic development of our greed of years past and the recession will stay with us in the years to come.”
An outspoken opponent of the economic adjustment programme imposed by the international lenders, Theophanous said, “I don’t believe in the Troika. I only believe in God.”
He said that even at the eleventh hour, it is possible to revise many of the conditions of the bailout plan and listed 20 ways to improve revenue earning and abandon the Troika programme, “that has created more problems than solving them.”
Unfortunately, he said, this and many other proposals by the Centre or any other think tank keep on falling on deaf ears. Asked by the Financial Mirror if his suggestions had been reviewed by the National Council for the Economy, Theophanous laughed.
Admitting that the government’s proposed bills on foreclosures is necessary, he said that “this alone will not save the situation.”
NEW SOCIAL CONTRACT
“It is impossible to repay any private or public debt under conditions of continued and deep recession. What we need is for the government, the politicians and society to work towards a comprehensive holistic approach for the economy. We need a new social contract.
“While our study is focused on NPLs, that account for 50% of all loans, it is vital that there be effective measures for the real economy. At this rate, even with a down revision of the GDP (by the European Commission and the statistics service), our debt management is still not viable,” Theophanous said.
Kyriakos Georgiou said that Cyprus has already repaid 9 to 13 bln to international lenders, while receiving only 5.9 bln from the 10 bln euro bailout plan.
“I don’t know how much of the remainder 4 bln euros we will need, but the administration does not seem to be too worried to cover its immediate needs as it seems confident of its current revenue earning plans.
“We are not that confident,” Georgiou said, adding that the current tax regime encourages tax evasion, not revenue collection.
The study suggests that Cyprus, at its present state, can seek a multifaceted support programme, similar to the Marshall Plan, and relaxation of the memorandum of agreement contracted with the Troika.
Theophanous said that there should be efforts to renegotiate the Emergency Liquidity Assistance (ELA) afforded to Laiki and subsequently burdened on to Bank of Cyprus, as well as a comprehensive plan to manage the NPLs and the introduction of banking arbitration.
LOWER LIQUIDITY RATIOS
Liquidity must return to the market and generous incentives to help reduce loans repayments, he said, adding that banks could also argue for a lower liquidity ratio, as this will come out of the stress tests, expected at the end of this week.
One source of fresh revenue is foreign direct investments, with specific incentives provided to potential investors, including tax breaks to CEOs and financial advisors, while a red carpet service is mandatory to deal with labour and migration issues. However, Theophanous also admitted that the “one stop shop” declared by present and past administrations has never materialised.
Tourism, and reviving Cyprus as an education and medical centre must be encouraged to bring in fresh funds, he said.
“I am confident that tax reform will lead to positive earnings, but also clamp down on tax evasion,” Theophanous said, explaining that the study’s proposals include lowering the higher income tax bracket from 35% to 30%, VAT from 19 to 15% and the reduced VAT from 9 to 7%, corporation tax from 12.5 to 10% and tax on interest from deposits from 30% to 9.5%.
“Who in his right mind would deposit money if the interest is going to be taxed? That is why we need to revive trust in the banking system and encourage deposits once again.”
Theophanous added that contributions to the Social Insurance Fund could also be reduced from 7.8% to the previous 6.8% and a reduction of property tax to zero for real estate worth up to 150,000 euros, a 50 euro tax for properties worth 150,000 to 200,000 and a gradual rate for properties above that, ranging from 0.0005% to 0.0125%.
However, Theophanous concluded that while wages must be kept at present levels and not to reduce the public sector salaries any further in order to maintain a level of purchasing power, the civil service workforce must be reduced, while economies of scale achieved by the merging of public service.
