EDITORIAL: Tassos’ “social package” a threat to Cyprus economy

It was natural to expect that in their zeal to grab every vote, the three main presidential hopefuls would offer all sorts of packages to lure in the undecided voters. And as was to be expected, the young and the elderly are being promised heaven and earth as the candidates target the two groups likely to decide the outcome of the elections.

This is a normal phenomenon and happens in every democratic country, so Cyprus could not be an exception. Unfortunately, none of the three main candidates are explaining the source of their generosity, in other words, who will pay for all the additional spending.

While the opposition candidates, Ioannis Kassoulides and Demetris Christofias may be excused for not immediately revealing their sources of funds, in the hope of convincing the undecided to tilt their way, we are disappointed in the policy of the incumbent, Tassos Papadopoulos not to reveal his sources of funds as he announced a package of new economic and social measures.

We have previously said that the President’s strongest point had been his handling of the economy and the fact that during his term of office, the fiscal deficit as a percentage of GDP fell from a deficit of 6.2% to a surplus, with no increase in taxation. Based on this improvement and the sustainability plan submitted to the EU, Cyprus was allowed to join the euro-zone on the understanding that it would stick to maintaining a balanced budget and sound economic policies.

In the run-up to next month’s elections, Papadopoulos is unveiling social and economic plans by the bucket-load. He has even promised to cut the three main income tax brackets from 20% to 15%, from 25% to 20% and from 30% to 28%.

It does not take a genius to realise that when you reduce the income tax rate on income earners and at the same time increase spending, this will result in a deficit. And if Tassos would consult his Finance Minister Michalis Sarris, at a time when the forecast for growth in 2008 according to his own government is for 4.1% growth, then he would see that a tax reduction will simply boost consumption, adding to the rate of growth and in turn fuel the already rising inflation rate.

If Cyprus could decide on its own rates, then perhaps one could argue that even if there were inflationary pressures, the administration would convince the Central Bank to hike interest rates, in order to cool the economy.

But, and there is always that but, since January 1 Cyprus is a member of the euro-zone and its monetary policy is decided in Frankfurt by the ECB and not in Nicosia by the Central Bank MPC.

With the US having entered a recession, the UK very close to experiencing a slowdown and Europe’s largest economy, Germany, starting to show signs of fatigue in consumer spending, it does not take many more geniuses to conclude that the world economy is entering a slow growth environment and sometime during 2008, the slowdown will also be felt in the eurozone, which means the ECB will be more inclined to keep rates unchanged, or as is more likely, proceed with a rate cut.

Imagine the screw-up here when because of tax reductions and extra aid packages to pensioners, the blind, the disabled, large families, underage dependants and so many other groups, the Cyprus economy over-shoots while the ECB keeps rates unchanged or proceeds with a rate cut.

All the pain and suffering that the country endured in the last five years until the state of the economy corrected will have been for nothing and will be blown away simply because Tassos decided to sacrifice the economy in order to get re-elected!