Cyprus: Government Budget Design, Debate and Implementation

Lack Utter Seriousness

The Government and House members of DYSY are desperate for the Government budget for 2022 to be approved even it is a bad budget. And it is a bad budget being poorly designed and based on outdated and unrealistic assumptions. However, by having their amendments to this bad budget agreed to, certain political parties along with DYSY are most likely to pass the 2022 Government budget.

Budget Design and Assumptions

The government budgets for 2022 to 2024 were finalized and presented to the House of Representatives in early October 2021. The budget for 2022 projected government revenues to rise by 4.7% and somewhat incredibly government expenditures to decline by 4.0% resulting in the deficit falling to 1.1% of GDP compared with 5.0% in 2021.  These budget estimates were premised on assumed increases in prices averaging 2.0% in 2021 and 1.5% in 2022. However, there has been a strong upsurge in the rate of inflation in recent months with consumer prices in the 12 months to November2021 rising by 4.3% and the industrial output price index in the year to October 2021 increasing by 13%.

Also, the government budget for 2022 was based on the projected outcome of the 2021 budget, showing a deficit of 5 % of GDP as a result of a forecast 8.4 % rise in revenues and a forecast 6.7% increase in expenditures.

But, in the face of a much higher rate of inflation than earlier projected and expenditure over-runs in the implementation of the 2021 budget owing partly to a series of supplementary budgets, the Ministry of Finance has failed to update and revise the budget for 2022 that is now being debated by MPs.

Budget Debate

In the debate on the core 2022 budget MPs have not questioned the fact that it is based on outdated and very optimistic assumptions. And only a very few MPs appear to have carefully scrutinized its objectives in terms of whether it is directed toward helping to raise the living standards of most of the population.

Indeed, most MPs are merely proposing amendments to the core budget so as to add or deduct certain expenditure allocations in order that they can approve the budget if their amendments are accepted. It is reported that leader of DYSY, Averof Neophytou, has agreed to the amendments put forward by the DIKO and DIPA parties meaning that together with the support of DYSY the budget for 2022 will be approved. Thus, without any serious scrutiny of the substance of the budget and given its expected approval based on acceptance of modest amendments, the budget debate surely has lacked any real seriousness.

Budget Implementation

Governments in recent years have increasingly failed to execute development projects with the implementation rate under 70%, and the rate for 2021 expected to be much lower. The institutional capacity in the Government to effectively carry out development expenditures is grossly deficient. Yet at a time when the government is trumpeting its commitment to implementing the Recovery and Resilience plan with its multitude of 76 investment projects the Government is doing little to strengthen its institutional capacity including employing competent employees. In fact, over the year to November 2021 the government appears to be deteriorating its institutional capacity by employing 1,003 more casual workers and reducing the number of permanent workers by 355.

In view of the likelihood that government expenditure could rise to much higher level than originally budgeted owing to the unforeseen expected increases in prices and costs and the fact that there will be intense pressures on expenditure in a pre-Presidential election year there would seem to be a compelling need to greatly improve the government’s revenue performance, especially by taking action to combat tax evasion. But the budgets show no evidence that tax administration will be revamped. And budget estimates reveal that income taxes collected from the self-employed, which are notorious for their tax evasion, are projected to fall from 36.2 million euro in 2021 to a pitiful 34 million euro in 2022.

Conclusion

Thus, it is the opinion here that the Government and leaders in the House of Representatives have shown an irresponsible lack of seriousness in designing the budget, in debating and carefully scrutinizing its assumptions and substance, and in preparing for its effective implementation through strengthening the government’s institutional capacity.