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By Peter Stevenson MEMBERS of Volunteer Doctors Cyprus have treated around 350 people at their free clinic in Nicosia since it opened three months ago, while two more, one in Paphos and one in Polis are due to open today. Limassol also has a free clinic, which was opened only last month, and plans have been drawn ...
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Cyprus Internet Directory [ Government needs to learn some economic realism ]

Government needs to learn some economic realism

IN HIS election programme, President Christofias included a long list of state benefits that would be given to an assortment of beleaguered groups of citizens, as well as an abundance of grandiose projects that would be undertaken by his government. These were extremely generous and ambitious promises, the cost of which had not been calculated properly as the primary objective was to attract a maximum number of votes.

This is not to say that Christofias knowingly tried to deceive voters by making promises that he had no intention of keeping. The mistake was that the financing of the benefits and projects he had promised was not given much serious thought. Too many mistakes had been made in estimating expected state revenue for this and next year, the biggest one being that the economy would continue to grow at the same high rates as in 2007 and that inflation would be at a manageable level. Christofias had also put a restriction on his ability to increase state revenue by promising not to raise taxes.

Three-and-a-half months into his term, the president has realised that the state does not have the funds to pay for the promises he has made. Taxes from the construction boom are down, the state pay-roll, which accounts for half the government’s spending, is constantly rising thanks to the Cost of Living Allowance, and costly new desalination plants are urgently needed. We are also on the verge of a recession, which will affect the government’s tax revenue.

Faced with this cash shortage, the government has been desperately looking for new revenue so that it could start implementing the president’s election promises. Like all governments during difficult times, it turned to the Church, demanding the settlement of unpaid taxes. It has also been trying to get its hands on the gold reserves of the Central Bank, an idea brought up by the previous government, but rejected by the Governor whose approval was necessary.

In the last couple of weeks, Finance Minister Charilaos Stavrakis has been trying to secure political support for the sell-off of the Central Bank’s gold, aware that this was the only way to overcome the Governor’s objections. He has not been very successful, with the political parties divided on the matter, but does not look like giving up. The question is what would he do with money? Initially, the government avoided saying how it would be used, arrogantly asserting that it belonged to the people and suggesting that the Central Bank Governor had no right holding on to it now that Cyprus was in the euro zone and did not need gold reserves to support its currency.

This stance was subsequently softened, when it was obvious that the European Central Bank would have a say in the issue. The Government Spokesman announced that the money from the sale of the gold would be used to reduce the public debt and not to finance state handouts. Such a move would have the approval of the ECB, while it would reduce the government’s debt repayments and make some money available for the state handouts the president had promised during his campaign.

We cannot blame the president for trying to keep his election promises, but he needs to recognise that economic conditions have drastically changed in recent months and this necessitates a change of policy. We are on the verge of a recession and the government needs seriously to rethink its economic policies. If there is any spare state cash it would be better spent on essential development and infrastructure projects (not new highways that we do not need), rather than for non-productive purposes. Introducing new state benefits or increasing pension payments during an economic downturn is a recipe for disaster, as it would put state finances under increasing pressure, without helping the economy.

Christofias needs to show pragmatism on the economy, even if he will be attacked for not keeping his electoral promises. As long as he explains to people why these promises have to be put on hold for now, he will suffer very little political damage and his credibility will remain intact. And if he wants to create a welfare state that would ensure a fairer society, he should first find a way of financing it long-term, instead of selling off the Central Bank’s gold, which would provide a temporary solution. Perhaps he should consider reducing the public sector wage-bill, which is the root cause of the perennial lack of state funds.


(Source: Cyprus Mail)



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