Cyprus to submit economic stability package soon

Stavrakis warns of deficit breaching 7% of GDP

Cyprus will outline tax and cash saving proposals to rein in a widening deficit in a stability programme to the European Union this month, Finance Minister Charilaos Stavrakis said on Tuesday.
The government is considering increases in value added tax, pay freezes across the public service and a clampdown on tax evasion to curtail a fiscal shortfall seen hitting 7% of gross domestic product this year, more than double the euro zone limit.
Any suggestions would be in the package submitted to Brussels, a finance ministry source said. "The report is still being worked on and will be submitted in the next few days," the source said. Stability programmes look five years ahead and are regularly updated.
The source, who declined to be identified, denied a report in a Cypriot daily which quoted Stavrakis saying the package had already been submitted to Brussels for approval.
Cypriot authorities had previously said there would be a consultation process involving political parties and labour unions before measures were implemented.
Authorities may increase VAT rates for goods in a low tax bracket and have already said they want to revamp a tax system on real estate and pursue a pay freeze in the civil service.
Cyprus has a standard VAT rate of 15%, which would remain unchanged, but the likely candidates for an increase are goods in a lower band of 5 and 8%, applicable from pharmaceuticals to coffins, hairdressing and certain food items.
Cyprus was lashed by the financial turmoil in 2009 on an earnings slump in a once buoyant property market and a 17% drop in revenue from tourism, a key money spinner.
The EUR 17.2 bln economy, one of the smallest in the euro zone, contracted by 1.7% last year. The finance ministry said in January the 2009 deficit was around 6%, but final figures for last year are not yet available.
Stavrakis has warned that the initial forecast of 7% fiscal deficit for 2010 made by his Ministry is on the optimistic side and was based on certain assumptions that could be delayed, resulting in a higher deficit.
The warning was made in a “confidential” letter sent to President Christofias on February 18 by the Ministry of Finance, leaked to the press in order to reduce possible resentment to a planned measures of cost-cutting that the government wants to push forward in order to lower the deficit. Informed sources told the Financial Mirror that the leak may also be related to the annual assembly of the Pasydy civil servants union, whose support is needed to push with cost cutting measures.
The initial estimates made by the Finance Ministry forecasting a deficit of 7% of GDP in 2010 were based on the assumptions that the government would receive inflows of EUR 80 mln from Cyta (almost all of 2009 profits), no general salary increases would be given to civil servants and the transfer of EUR 50mln to the state reserve fund from Central Bank profits which resulted from the conversion of the CYP to EUR, as well as an additional EUR 100 mln which could potentially be derived from the conversion of CYP notes to EUR.
Finally, the Minister acknowledged that the initial measures announced in December 2009 for fiscal consolidation that called for an annual EUR 500 mln reduction in fiscal deficit look very optimistic and that for 2010 the expected impact on the fiscal deficit would fall to EUR 200 mln. This would result from the delay in the implementation of the announced measures coupled with less optimistic forecasts for inflows to be received from house planning amnesty and other adjustments in property tax.