Major projects and RRF, keys to maintaining growth rates, Fiscal Council says

The Cyprus Fiscal Council has stressed that the completion of the major projects that are ripe for implementation, in combination with the acceleration of the implementation of the Recovery and Resilience Plan (RRF) will be key to maintaining growth rates in the next 18 months. 

In its interim report, "August 2024", the Council stresses that "if the Republic listens to the Council's Recommendations, which include the immediate strengthening of administrative capacity with the aim of accelerating the implementation of the conditions for the projects related to the Recovery and Resilience Plan, the estimate for the growth in 2025 and 2026 should be revised upwards."

The Council states that the Ministry of Finance's estimate for growth at 3% is consistent with the estimates of independent institutions and agencies and adds that "despite the fact that there are risks to growth, the estimate is not considered unrealistic."

It notes that despite the difficulties for households, where disposable income shows decreasing trends, consumer demand remains stable adding that the increased economic activity in terms of investments also contributes to the maintenance of growth rates.

However, it points out that "despite the continuation of revenue growth rates, the parallel increase in expenditures, especially inelastic ones, lead to an imbalance equation for the coming years, that would be wise to be avoided early on."

According to the Council, the overall increase in the Republic's expenses is slower than the increase in revenues, but the composition of the expenses (and the source of the savings) predisposes to the formation of structural weaknesses in public finances, and gradually create imbalances in the structure of public finances.

It notes that while the sustainability of the debt is not in question, a potential continuation of the current course is estimated to possibly lead to politically, socially and macroeconomically painful decisions in the coming years, to correct the structural weaknesses and ensure the fiscal space that each government needs in order to exercise policies.

The Council says that it should be taken for granted that decisions affecting public finances, such as the increase in the state payroll as agreed on 18.7.2024, should be accompanied by equal savings from other budget funds.

Furthermore, it says that an important parameter, will be, firstly, the strict observance of the expenditure ceilings as they are today in the Strategic Framework for Fiscal Policy and secondly the avoidance of any revision.

It notes that this need implies that any new spending should be accompanied by simultaneous overall savings over the four-year period, while supplementary budgets should now be limited to circumstances of real need instead of the common practice to cover inadequate planning in the original budget, as is the case today.

The Council says that with the expected normalization of revenue growth rates, and simultaneous inelastic expenditure growth rates, the fiscal pressure may increase and overturn in a short period of time the positive surplus picture to date which allows, not only comfortable exercise of politics, but also the reduction of public debt.

Moreover, it notes that domestic demand, although relatively subdued, is expected to remain positive.

It says that the expected recovery in real household disposable incomes over the next 24 months encourages the assessment that private demand in the economy will withstand some of the increase in consumer debt, especially when taking into account the slowdown in housing loans, which are generally larger (in amount), in relation to consumer loans.

The Council notes however, that the shift towards consumer loans, even though it is offset by the reduction of housing loans, implies a worsening of the structure of private debt, especially if it is taken into account that consumer credits do not create assets for households.

The Fiscal Council reiterates its call for the collection and monitoring of data related to the inflow of individuals, capital and businesses and adds that today, the Republic is unable to collect demographic, business, consumer and other data related to inflows from Israel and Ukraine.

"Only with the collection and analysis of sufficient data, will it be possible to develop a competent management policy, both of the inflow itself, and of the risk created by a potential reversal of the inflows, especially in the case of Ukraine," the Council says.

It also notes that "the chronic negative current account balance is one of the most important macroeconomic imbalances of the Cypriot economy, which should immediately be the subject of policy planning."

(Source: CNA)