12/05/2004 20:34
The European Commission expressed its doubts on Wednesday with regard to the fulfillment of the latest government’s forecasts on the Cyprus fiscal deficit.
According to the European Commission Report, the island’s fiscal deficit is likely to reach 4.6% of the GDP for 2004, if the government doesn’t take the proper measures. The Commission has justified its doubts on whether Cyprus will drop its deficit to 4.3% of GDP with the “mixed historical record of fiscal consolidation and upward deficit revisions by the government”.
The European Commission emphasized that the debt-to-GDP ratio remains above the 60% of the GDP. The debt dynamics in the period 1998-2003 were mostly driven by “inadequate level of primary surpluses”. According to the EC forecasts, public debt for 2004 is expected to reach 74.6% of the GDP.
EC not to impose fine
According to sources, the Economic and Financial Committee will express its view for each of the six new EU member states who have a higher fiscal deficit separately. The states with a deficit of more than 3% are the Czech Republic, Poland, Hungary, Malta and Slovakia. The Committee will further recommend additional measures to deal with the excessive deficit in the next few weeks and before the ECOFIN meeting of July 5. Commissioner Joaquin Almuna, however, stressed that the six new member states will not run the risk of submitting a fine to the EU, since they are not EMU members, but they have to drop deficit below 3% if they wish to enter the eurozone soon.
In its Report, the European Commission outlines the budgetary developments in Cyprus for the past few years before its accession in the EU:
“Cyprus has so far shown a mixed record on fiscal consolidation. After several years of high GDP expansion and relatively contained fiscal deficits, fiscal policy turned aggressively expansionary in reaction to the slowdown in 1996-97. Spending rose across the board, swelling the general government budget deficit from 3.4% of GDP in 1996 to around 5% of GDP in 1997 and 1998. To counter this deterioration, a fiscal consolidation plan was introduced in 1999 that included a series of mostly one-off measures and aimed at reducing the deficit to 2.0% by 2002. The fiscal consolidation programme was relatively successful in that it contributed to lowering the general government budget deficit to 2.4% of GDP in 2000 and 2001, although slippage started to occur in 2001. The programme was revised and extended in 2001 and 2002. At the same time, fiscal consolidation again went increasingly off-target, with the deficit reaching 4.6% of GDP in 2002 instead of a previously planned 2.6%. This slippage can partly be ascribed to lower GDP growth. Furthermore, also adversely affecting public finances for 2002 were unexpectedly high defence outlays and, similarly to 1997-1998, expenditure aimed to offset the economic downturn. These expenditure increases more than offset declining outlays from a phasing out of subsidies and lower interest payments. At the same time, a staged tax reform starting in mid-2002 to lower direct taxation and increase indirect taxation2 aimed to have a zero impact on public finances. However, this was not implemented as originally planned, as one-off compensatory measures were introduced in order to secure broad political support.
For the period 1998-1999 Cyprus ran primary deficits, followed by a surplus in 2000 and 2001, in line with the fiscal consolidation efforts. With the fiscal slippage in 2002 the primary balance returned to (increasing) deficits. Despite concomitantly rising debt stocks, lower interest rates kept total interest payments at around 3-3½% of GDP.”
According to the European Commission Report, the island’s fiscal deficit is likely to reach 4.6% of the GDP for 2004, if the government doesn’t take the proper measures. The Commission has justified its doubts on whether Cyprus will drop its deficit to 4.3% of GDP with the “mixed historical record of fiscal consolidation and upward deficit revisions by the government”.
The European Commission emphasized that the debt-to-GDP ratio remains above the 60% of the GDP. The debt dynamics in the period 1998-2003 were mostly driven by “inadequate level of primary surpluses”. According to the EC forecasts, public debt for 2004 is expected to reach 74.6% of the GDP.
EC not to impose fine
According to sources, the Economic and Financial Committee will express its view for each of the six new EU member states who have a higher fiscal deficit separately. The states with a deficit of more than 3% are the Czech Republic, Poland, Hungary, Malta and Slovakia. The Committee will further recommend additional measures to deal with the excessive deficit in the next few weeks and before the ECOFIN meeting of July 5. Commissioner Joaquin Almuna, however, stressed that the six new member states will not run the risk of submitting a fine to the EU, since they are not EMU members, but they have to drop deficit below 3% if they wish to enter the eurozone soon.
In its Report, the European Commission outlines the budgetary developments in Cyprus for the past few years before its accession in the EU:
“Cyprus has so far shown a mixed record on fiscal consolidation. After several years of high GDP expansion and relatively contained fiscal deficits, fiscal policy turned aggressively expansionary in reaction to the slowdown in 1996-97. Spending rose across the board, swelling the general government budget deficit from 3.4% of GDP in 1996 to around 5% of GDP in 1997 and 1998. To counter this deterioration, a fiscal consolidation plan was introduced in 1999 that included a series of mostly one-off measures and aimed at reducing the deficit to 2.0% by 2002. The fiscal consolidation programme was relatively successful in that it contributed to lowering the general government budget deficit to 2.4% of GDP in 2000 and 2001, although slippage started to occur in 2001. The programme was revised and extended in 2001 and 2002. At the same time, fiscal consolidation again went increasingly off-target, with the deficit reaching 4.6% of GDP in 2002 instead of a previously planned 2.6%. This slippage can partly be ascribed to lower GDP growth. Furthermore, also adversely affecting public finances for 2002 were unexpectedly high defence outlays and, similarly to 1997-1998, expenditure aimed to offset the economic downturn. These expenditure increases more than offset declining outlays from a phasing out of subsidies and lower interest payments. At the same time, a staged tax reform starting in mid-2002 to lower direct taxation and increase indirect taxation2 aimed to have a zero impact on public finances. However, this was not implemented as originally planned, as one-off compensatory measures were introduced in order to secure broad political support.
For the period 1998-1999 Cyprus ran primary deficits, followed by a surplus in 2000 and 2001, in line with the fiscal consolidation efforts. With the fiscal slippage in 2002 the primary balance returned to (increasing) deficits. Despite concomitantly rising debt stocks, lower interest rates kept total interest payments at around 3-3½% of GDP.”
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