CABINET PASSES BUDGET, SLASHES DEFENCE LEVY

Cyprus Mail - article 13 September 2018

By Stelios Orphanides

The cabinet on Thursday approved the 2019 budget and the budgetary framework over the next three years, including a reduction of the defence levy, the finance minister said

Next year’s budget provides for €8.5bn in revenue and €7.9bn in spending which generates in turn a surplus of 3 per cent of the economy, Finance Minister Harris Georgiades told reporters after the cabinet meeting.

It also provides funds for the creation of a junior ministry in charge of tourism and the implementation of the national health scheme as well as the introduction of a “chief scientist,” an institution to reform research and innovation, Georgiades said.

“The right management of public finances and strong economic growth allowed us to turn fiscal deficits into surpluses,” Georgiades said.

“Prudent fiscal management allows another tax relief. The government is therefore proposing to reduce the extraordinary defence levy on interest income from 30 per cent to 17 per cent from January 1, 2019 onwards”.

The budget aims at consolidating economic growth, as the economy is projected to expand 4 per cent this year and 3.8 per cent in 2019, further reducing unemployment which was seen in July at 7.3 per cent, he said.

Public debt, which once more exceeded this year the size of the economy after the government issued new bonds to support the Co-op, is expected to close this year at 104 per cent of gross domestic product (GDP) before it once more falls below the 100 per cent mark next year, he said.

“The basic aim of economic policy is the consolidation of growth and full employment conditions to benefit the entirety of our fellow citizens,” said Georgiades. “I believe that the budget serves exactly this purpose. Maintaining macroeconomic stability, prudent fiscal management and avoiding fiscal shortfalls are recondition for sustainable growth”.

“The smooth functioning of the banking system and an economic environment favouring investment and business through continuous reforms are (also) a precondition,” Georgiades added.

His comment come as a committee investigating the causes that led to the demise of the Co-op, recapitalised by the taxpayer with €1.7bn, continues its work received testimony from several key witnesses about the friendly personal relation Georgiades had with the failed state-owned bank’s top management.

Cyprus, which finished its bailout programme in March 2016, made necessary by a twin fiscal and banking crisis three years before, left key reforms behind, including that required for an effective management of non-performing loans, which came to haunt it earlier this year. The failure of the Co-op to reduce its delinquent loans, resulted in its equity being wiped out. This in turn compelled the government to issue €3.2bn in bonds in the second quarter of 2018, made necessary by the agreement between Hellenic Bank and the Cyprus Cooperative Bank for the acquisition of the latter’s operations.

The parliament in July passed a new package of laws amending the foreclosure and insolvency framework as well as that on the sale of loans. Other key reforms for the economy, including the overhaul of the public sector’s human resource management system and privatisations, remain pending partly on political opposition.

“Recent action related to the banking system are considered positive and have been evaluated as such by rating companies,” he said.

Georgiades said that both in 2019 and this year, the government is expected to generate a fiscal surplus of €0.5bn compared to a surplus of €350m last year and €60m in 2016.

Public expenditure is expected to increase 3 per cent which will allow the implementation of projects, including e-governance at a €250m cost which he described as “the most effective form of public sector reform”.