2020 budget projects 2.9% GDP growth and fiscal surplus, clouded by uncertainty over ‘pay cut’ ruling

Cyprus’ 2020 state budget forecasts slower GDP economic growth of 2.9% next year and a fiscal surplus of 2.7%.

The 2020 state budget, approved by the Cabinet, is balanced with a fiscal surplus, said Finance Minister Harris Georgiades. It foresees a fiscal surplus of 2.7% and a primary surplus of 5.1%.

Due to the state of government finances, Georgiades said there was no need for tax hikes or any other financial burdens.

But he did concede there was a significant increase in health expenditures as result of the implementation of the national health system (GHS) and the operation of the State Health Services Organisation OKYPY.

On Brexit, the Minister assured that Cyprus was “adequately prepared for any eventuality”.

Georgiades said the budget forecasts a growth rate of 2.9% which would lead to conditions of full employment. Government revenues are estimated to reach EUR 10 bln while expenditure is estimated at EUR 9.4 bln.

Inflation is projected to stand at 1.2%, while the unemployment rate is expected to drop to around 6%.

Public debt to GDP ratio is predicted to fall to 91.1% as a result of an early repayment of debt to the International Monetary Fund scheduled for 2020.

“This is yet another state budget without a deficit. Bad practices belong to the past with no return”, Georgiades said.

He said the budget enables the implementation of the government’s programme, with one-billion-euro worth of projects underway, while it foresees investments in e-governance and digital transformation worth EUR 250 mln.

The budget also provides expenditures for new policies such as the establishment of an investment fund to finance new innovative enterprises as well as the establishment of a Deputy Ministry for Innovation and Digital Policy.

Georgiades said a Troika mission that is currently paying a visit to the island would be informed about budget projections. The budget will be discussed in parliament from next month.

He warned that the biggest and immediate potential risk that could undermine fiscal stability would be a decision of the Supreme Court to restore public service pay cuts.

Following an administrative court decision in March that salary reductions imposed on civil servants as part of austerity measures in 2012 were unconstitutional, the government appealed to the Supreme Court which is now expected to rule on the case.

Clouded by uncertainty

With the unknown consequences of a court decision which rendered civil service salary cuts in 2012 unconstitutional, the government is preparing its budget proposal for next year.

The 2020 budget is expected to produce a surplus, despite an expected slowdown in the economy and the uncertain exogenous environment.

In earlier comments to Stockwatch, Georgiades said “the main fiscal risk stems from the court proceedings regarding civil servants’ payroll”.

The Supreme Court has yet to rule on the government’s appeals against the firstinstance court decision which found pay cuts and pension reductions to be unconstitutional.

If pay is returned to all civil servants retrospectively, the cost to the state is estimated to range from EUR 844 mln to EUR 3 bln, depending on who is affected.

In such a case, the government has previously said that it will change the constitution and enforce cuts equal to the money returned.

Pay cuts were part of austerity measures imposed by a cash-strapped government that tried to reign in debt as the economy went into meltdown, as a result of a runaway public sector deficit and the banking system’s uncontrolled exposure to toxic Greek government bonds.