EARLY this morning the Cyprus Finance Minister, Mr Charilaos Stavrakis, meet with MPs and social partners to present the government’s package of measures which are designed to reduce state expenditure and increase revenues.
The package, which is estimated to be worth €500 million, includes proposals for eliminating tax evasion, an town planning amnesty and re-evaluating the tax system on property. It also includes measures for lowering the cost of public pensions, targeting social benefits and reducing the number of public service employees by 1,000 over the next five years.
Cyprus has lost more than €1.0 billion in earnings this year, equivalent to 6.7 points of its GDP. The drop is primarily from a collapse in property sales and tourism.
During his presentation the Minister spoke about the structural problems faced by the Cypriot economy and stressed that if his proposed measures were not adopted the Islands fiscal deficit could reach 6% of GDP in 2011.
Mr Stavrakis explained that to reverse the situation the Government needs to find €500 million in additional revenues and savings, which corresponds to 3% of GDP. The package includes:
- €80 to €100 million – reappraisal of property taxes
- €75 million – town planning amnesty
- €100 million – combating fraud and tax evasion
- €100 – targeted social benefits
- €150 million – pension cost reductions
The reappraisal of property taxes will introduce higher tax on property other than a home by adjusting valuations on real estate that have remained unchanged for 30 years. This reappraisal is expected to bring in an additional €100 million, while the proposed town planning amnesty could bring in a further €75 million next year.
The crackdown on fraud and tax evasion could result in a further €100 million of revenue to the state.
Regarding state expenditure, he said that the extraordinary measures announced earlier this year will not be repeated in 2011. These include the drop in the consumer tax on heating oil (€13m) which is a non-targeted measure. He also referred to the VAT ratio in restaurants and savings in medicine purchases.
The Minister stressed that another target is to reduce the number of the public employees by 1,000, the suspension of new job posts for 2 years, the termination of appointments of temporary staff and the abolition of a percentage of the permanent positions.
The Minister made it clear to the partners that the package does not recommend a drop in salary scales for new entrants into public service, but Mr Stavrakis stressed the need for restraint in salary increases and freezing the funds for overtime payments.
However, he referred to an increase in public pensions, structural problem due to the ageing population and salary increases. He recommended a drop of the state payroll by 20% (from 35%), saving €150 million per annum.
He proposed that better targeting of social benefits will result in their cost declining by 10% or €100 million by excluding those without financial needs.
On the subject of growth the Minister said that top priority projects will be accelerated, a favourable tax regime will be maintained, he will try to boost double taxation agreements and improve the regulatory framework.