Filenews 23 December 2023
With some comfort and without the pressure of European fiscal rules, Cyprus is moving forward in the coming years, on the basis of the relatively loose fiscal policy led by yesterday's very important agreement in Ecofin between the finance ministers of the EU members.
Finance Ministry sources, commenting to "F" on the agreement of finance ministers on the new Stability Pact, reached after a last-minute convergence between Germany and France and with the consent of the third major European economic power, Italy, said that the fiscal targets set by Cyprus exceed the requirements of the new EU fiscal rules.
Ministry sources, without giving a detailed analysis of the expected impact of European decisions on Cyprus, said that decisions at Ecofin level do not pose a problem to the economy and added that Cyprus was supportive of the effort made at European level on the issue of promoting investments in the green economy.
Especially, on the issue of public debt and its relationship to GDP, the decision taken by Ecofin is in line with the policies followed by the ministry, it was pointed out.
The great general change agreed through the rules of the Stability Pact, so that they can be realistically adapted to the era of high debt of European states, after the pandemic crisis and the huge expenditures it required, and to pass into the past the unrealistically strict and inflexible approaches of the old Stability Pact, the terms of which few countries satisfied, anyway.
What's changing towards the looser?
The deficit and debt limits (3% deficit and 60% of GDP debt) are maintained, but the indicator to be monitored by the Commission will be net primary expenditure, i.e. expenditure that is fully under the control of a government, excluding interest.
Fiscal convergence programs will be tailored to each country, something that has been stubbornly demanded by many countries, under Germany's objections. Based on a debt sustainability analysis, the European Commission and the country concerned will agree on a path for net primary expenditure over the next four years, with the aim of bringing the debt and deficit below the 3% and 60% of GDP thresholds.
In practice, the convergence period will be seven years, when a country invests heavily in the green and digital transitions and defence.
It was decided, at the request of several Member States, including Greece, that the new fiscal rules would provide that when deficit and debt thresholds are exceeded, it would be taken into account whether it is due to high defence investment spending. Under the current – under abolition – rules, any member state that has a debt of more than 60% of GDP is obliged to reduce its debt every year by 1/20 of the excess amount. Under the new rules, the required debt reduction will be calculated on the basis of the characteristics of each member state.
In Cyprus, based on estimates by the Ministry of Finance, public debt is estimated at 80.9% of GDP in 2023, with a downward trend towards 72.9% in 2024, 67.3% in 2025 and 60.1% of GDP in 2026.
For states with debt between 60% and 90%, the minimum average rate of reduction required would be 0.5%. With the abolition of the 1/20 rule, the requirements for limiting public debt in the next few years will therefore be significantly reduced.
Surpluses in Cyprus
In addition, the new fiscal rules reduce the minimum requirements for reducing budget deficits. In particular, existing rules require Member States to set government deficit targets that are more ambitious than the 3% ceiling set by the Treaty.
Their purpose is to ensure that even in times of economic crisis, i.e. when the deficit will de facto be higher, Member States manage to meet their obligations.
The new rules set a single and less stringent deficit ceiling, which stipulates that the deficit should not exceed 1.5% of GDP. Cyprus does not have a deficit anyway and will not have one in 2024 either. It expects a primary surplus of 3.3% of GDP in 2023, 3.6% in 2024 and 3.5% in 2025 and 2026 respectively.
