Tuesday, 25 September 2012

Austerity Measures and Reforms in Cyprus

The first thing I read today were the austerity and reforms guideline plans prepared by Troika for the island of Cyprus, which has requested a bail-out in the summer. According to them, the country's fiscal deficit has to be reduced to about 4% of GDP in 2012, 2.5% in 2013 and in the realm of 1% in the next two years. 

Austerity measures for 2012 include:
1. Freezing of the Cost-of-living-adjustment (COLA), extension of the special contribution
2. Freezing of wages and filling of vacancies in the public sector for another 2 years (until 2015). Extend this regulation for all state officials and Members of the Parliament who will now see their allowances taxed (the law for the state officials has already been passed as I have seen)
3. Introduce an immediate early retirement penalty of 6% of the Government Employee Pension Scheme (GEPS)
4. Introduce a permanent contribution towards pension entitlements for all government employees
5. Abolish the 13th salary of the broader public sector employees and state officials, reduce 13th pension by 50% in the 1000-1500 bracket and 75% in the above 1500 bracket.
6. Increases in the excise duties for tobacco, alcoholic drinks, and motor fuel
7. Increase tax on dividends by 1% and to deposits by 0.015%

If one takes a good look in the above measures, the fact is that rough and rapid changes (like the ones in Greece) are proposed. The only measures which would be considered rough would be the abolishment of the 13th salary of all state officials and pensioners. However, we are talking about the 13th salary, an additional one which should not have been calculated in e.g. bank loan repayment installments. Granted, a 13th salary in Cyprus is part of the gross yearly salary and people are taxed on that, however, this is much better than actually reducing the rest 12 wages. As far as dividend tax is concerned, from what I understand, Cyprus has a fixed tax of 20% - which is rather odd since people who are earning 1 million euros a year and 50 euros a years end up paying the same rate. I would like to see the Troikans propose a new dividend tax scheme based on the tax bracket one belongs instead of a fixed rate (that is, for individual dividend-receivers). 

The 2013 cuts will include:
1. Abolishment of obsolete allowances as well as general government wages and salaries with a target reduction of 15% in the government bill (hopefully, they will be wise enough to focus on abolish allowances instead of reducing wages and salaries by 15%)
2. Reduction in social transfers by 10%
3. Reduction in the Easter, Christmas and Dietary allowance as well as abolishing heating allowance
4. Consolidate housing-related schemes
5. Reduce the number of government employees by 250 per year (1250 in total)
6. Reform shift-work system to reduce overtime remunerations by 20% in 2013, an additional 10% in 2014 and keeping the amount paid stable for 2015

Even in 2013, although Cyprus will still be in recession, austerity measures will not be so harsh as they have been anticipated. To compare in 2011 the Cypriot government had taken measures of 500 million euros compared to the 360 million of permanent measures the Troikans ask for 2012. Things will obviously get worse before they get better, however, the measures are much more conservative than those originally expected by the press and public. In addition, these measures were very much needed by the country, but just like any other nation in the world, politicians and policymakers did not want to make any reforms until the final hour. In any case, what I have been saying for over 2 months now, has finally been understood by the Troikans. Harsh and rapid changes are not a good solution for an economy. We have Greece to thank for that lesson (the country has paid a rough price for it though). Cyprus will have a much smoother bail-out period, provided of course that nothing extreme occurs!

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