The Fiscal Council has warned of a possible fiscal derailment as it feels the government is susceptible to pressure from political parties to give out new social benefits and lower taxes.
The council sees a danger that these extra benefits will become permanent expenses which cannot be met when a slowdown of income from the Citizenship for Investment scheme winds down.
Demetris Georgiades, the president of the council warned that the fiscal cushion created by the vigorous growth of the construction industry powered by the Citizenship for Investment scheme will come to an end at some point down the road.
Georgiades made the comments to Stockwatch, just a day after centrist party DIKO and ruling party DISY agreed for approving additional funds in the state budget to cover allowances for pensioners and the reduction in fuel consumption tax.
The Council is adamant, despite reassurances from Finance Minister Harris Georgiades that the measures proposed will not to impact the government’s fiscal goals.
The government estimates that the budget surplus will exceed 1.7% of GDP from 2018 to 2021, with the primary balance between 4.5-4.7%.
The ministry argues that public debt will begin to decline from 108% this year to 88% by 2021, mainly due to growth.
Referring to the “fiscal cushion” created by the citizenship scheme, Demetris Georgiades said that it is not clear for how longer it will last as it is difficult to calculate how big it is.
Georgiades said that the government was moving in the right direction when it was promoting the reduction of the defence tax in order to encourage people to make savings.
“However, this seems to be overturned as the government has decided to replace that measure with lowering tax on fuel. So instead of encouraging people to save up, we will be encouraging them to drive a car,” said Georgiades.
He criticised political party populism for exercising pressure on the government for tax relaxations and social benefits, “forgetting that Cyprus’ public debt is over 100% of GDP, while non-performing loans and borrowing are still high”.
He added that instead of concentrating on reforms that needed to be made, politicians are fighting over who will give out more benefits and handouts.
Georgiades said the council had suggested that the state saves a percentage of the surplus in order to send out the message that Cyprus is taking preemptive measures to help lower borrowing costs, making it an even more attractive investment destination.
