CYPRUS: State budget clouded by uncertainty over ‘pay cut’ ruling

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With the unknown consequences of a court decision which rendered civil service salary cuts in 2012 unconstitutional, the government is preparing its budget proposal for next year.

The 2020 budget is expected to produce a surplus, despite an expected slowdown in the economy and the uncertain exogenous environment.

In comments to Stockwatch, Finance Minister Harris Georgiades said: "All indicators and assumptions, such as (GDP) growth rate, unemployment and public debt, will continue to be positive in 2020".

However, he said "the main fiscal risk stems from the court proceedings regarding civil servants’ payroll".

The Supreme Court has yet to rule on the government’s appeals against the first-instance court decision which found pay cuts and pension reductions to be unconstitutional.

If pay is returned to all civil servants retrospectively, the cost to the state is estimated to range from €844 mln to €3 bln, depending on who is affected.

In such a case, the government has previously said that it will change the constitution and enforce cuts equal to the money returned.

Pay cuts were part of austerity measures imposed by a cash-strapped government that tried to reign in debt as the economy went into meltdown, as a result of a runaway public sector deficit and the banking system’s uncontrolled exposure to toxic Greek government bonds.

The 2020 budget has been drawn up under conditions of slower economic growth.

According to the strategic fiscal policy plan, the macroeconomic baseline scenario foresees a growth rate of around 3.2% in 2020, while in 2021 and 2022 it is estimated at 3.0%.