Cyprus Found To Be In Line With Stability And Growth Pact

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

24 January 2007

Having examined its updated convergence programme, the European Commission announced this week that Cyprus has presented a fiscal policy strategy in line with the Stability and Growth Pact.

Cyprus submitted a new update of its convergence programme on 6 December 2006, covering the period 2006-2010.

Based on a plausible macroeconomic scenario, fiscal policy in Cyprus is geared towards achieving the medium-term objective (MTO) of a structural deficit (i.e. a cyclically-adjusted deficit net of one-off and other temporary measures) of 0.5% of GDP by 2008, and a balanced position in both nominal and structural terms by the end of the programme period. The general government deficit and gross debt are planned to decline to 0.1% and 46.1% of GDP respectively by 2010 (from 1.9% and 64.7% respectively in 2006).

The EC observed that overall, fiscal policies are in line with the requirements of the Stability and Growth Pact. As the risks to the budgetary projections in the programme appear broadly balanced, the budgetary stance in the programme seems sufficient to ensure that the MTO is reached by 2008 and maintained thereafter, owing to expenditure restraint and in a context of strong growth prospects.

The general government gross debt is foreseen to approach the 60% of GDP reference value by 2007 and to continue declining in the subsequent years. The budgetary costs of an ageing population are, however, projected to be so significant that Cyprus is at high risk as regards the long-term sustainability of public finances

In view of the level of the debt and the projected increase in age-related expenditures, therefore, the European Council has been invited to recommend that Cyprus controls public pension expenditure and implements further reforms in the areas of pensions and health care in order to improve the long-term sustainability of its public finances.

"Cyprus is consolidating its public finances at a good pace and is expected to bring its public debt below the level of 60% of GDP, but more needs to be done to reform pension and health care in order to handle the budgetary impact of ageing," confirmed Economic and Monetary Affairs Commissioner Joaquín Almunia.

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