Harris Georgiades said the government aimed for a primary budget deficit – which excludes the cost of debt interest – of 3.0% of gross domestic product, compared with 4.25% outlined in the bailout deal. A draft budget for 2014, approved by cabinet yesterday – the island’s first post-bailout budget – provides for a 10% cut in net spending compared to 2013, Georgiades told reporters. 

According to finance ministry documents, the recession could be milder than the 8.7 percent 2013 baseline scenario, based on economic output in the first two quarters. It did not elaborate on this brighter outlook nor did it alter the baseline scenario for 2014, Reuters reported. “We wish we could spend more, and borrow to foster growth, but unfortunately we are paying for mistakes of the past,” Georgiades told reporters. “The basic characteristic of the budget is significant savings on expenditure. We are operating in a difficult economic environment,” he said.

The cuts translate to €626 million, short of the €700 million target set by the administration. The remainder will be covered by additional revenues and the rise in funding from the EU budget, the minister said. Many of the measures included in the budget had already been approved by parliament last December but they will come into force on January 1, 2014. They include an additional 3.0% cut from the public payroll, a one percentage point increase in VAT, a rise in social insurance contributions and targeting social allowances.

Georgiades also announced additional measures that will be proposed to parliament along with the budget. They provide for further rationalisation of allowances to save €18 million, pension contributions for temporary staff, including widows’ pension in taxable income to fetch €8.0 million, and better targeting of social pensions to save €10 million. “I also consider very important to retain the freeze in recruitment in the wider public sector for the next year also,” Georgiades said. “This is the most effective way to rein in and eventually reduce the public payroll.” The minister said no supplementary budgets would be submitted, a standard practice in past years that served to increase spending. “The government’s policy is to contain state spending. Consequently, the expenditure ceilings should be considered binding and we must remain very strict not only in drafting, but also in implementing the budget,” the minister said.

Cyprus agreed to a 10 billion euro aid package from the International Monetary Fund and the European Union in March afterits two major banks were all but decimated by their heavy exposure to debt-crippled Greece. For the first time in the history of the eurozone’s debt crisis, bank depositors were forced to shoulder the burden of recapitalising lenders. Bailout money from lenders is mainly geared towards fiscal needs of the island, slumped in a deep recession. The trio of lenders from the IMF, the European Commission and the European Central Bank reported Cyprus had made good progress in overhauling its banking sector and pushing through structural reforms in its first assessment of the island state in the summer.

It is due to start a second inspection visit to Cyprus in late October.

Source: Cyprus Mail