Cyprus Q1 budget confirms fiscal surplus has been spent

The budget results for the first quarter of 2009 show that the large budget surplus inherited by the government has now disappeared.
On the basis of the preliminary data on the general government accounts for the period January-March 2009, the deficit reached EUR 137.7 mln (0.8% of annual GDP), compared with a surplus of EUR 89.9 mln (0.5% of GDP) in the corresponding period of 2008.
When the nominally communist government took power in February 2008, it inherited a large fiscal surplus of 3.5% of GDP in 2007. This had shrunk to 0.9% by 2008.
The reason for the deterioration was both government spending and falling revenues. Total expenditure rose by 10.3% to EUR 1,715.5 mln, while total revenue fell by 4.1% to EUR 1,577.9 mln.
As befits a left-leaning government, the biggest rise was in social transfers, which rose by 13.2% compared with the year earlier to EUR 509.5 mln in the first quarter.
However, high inflation last year meant that index-linked wages rose quickly too, up by 8.7% to EUR 590.7 mln. Current transfers, on the other hand, fell by 7.6% to 181.6 mln. The finance minister, Charilaos Stavrakis, has recently tried to cut back on non-essential spending such as civil servant travel.
However, the government has evidently been engaged in pro-cyclical spending to try to counter the economic downturn. Spending on capital formation rose by 36.5% while spending on intermediate consumption was up by 30.9%.
On the revenue side the main categories for the period January-March 2009 were: taxes on production and imports EUR 651.7 mln (12.8% decrease), of which VAT rose by 0.1% to EUR 469.7 mln; taxes on income and wealth EUR 400.7 mln (7.7% decrease).
On the other hand, revenue from sales of government goods and services increased by 3.9% compared with the corresponding period of the previous year.

Fiona Mullen
www.sapientaeconomics.com