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Cyprus Announces Tax And Benefit Package

by Lorys Charalambous,, Cyprus

09 July 2007

The Cypriot government plans to raise income tax thresholds, slash the rate of value added tax on certain goods and increase spending on pensions as part of a social cohesion package announced ahead of Cyprus's imminent entry into the single European currency.

The announcement of the tax and spending package worth more than CYP100 million (EUR171.85 million) came just days before European Finance Ministers are expected to rubber stamp Cyprus's adoption of the euro in a meeting scheduled for July 10, but the government has assured that the measures will not affect its budget status, a crucial pre-condition for entry into the eurozone.

Under the measures, VAT on a large number of goods and services will be cut to 5% from 15%, although European Union approval is needed for this to become fully effective. The income tax free threshold will be raised to CYP10,750 from CYP10,000 in 2007, and raised again to CYP11,350 in 2008, which is expected to cost the government CYP35 million. The income tax measure is supposed to counteract an increase in VAT on foodstuffs in 2008, President Tassos Papadopoulos said.

The package includes an increase of 13.4% for pensions up to CYP200, an increase of 11.4% for pensions between CYP200 and CYP250 and an increase of 5.1% for pensions between CYP250 and CYP310. It also makes provision for further financial assistance to vulnerable groups, such as single parent families, persons with special needs and those suffering from chronic illness.

"We want both numbers and people to prosper," said Papadopoulos. “We are strengthening the population’s financially weakest groups, while with tax reductions we are paving the way for every family to enjoy a better quality of life,” he added.

According to Finance Minister Michalis Sarris, the package will not affect the budget, and he said that the government had achieved the fiscal criteria need to adopt the euro.

In May 2007, the European Commission has confirmed that Cyprus had achieved a "high degree of sustainable economic convergence" with the euro area member states and that it fulfilled the necessary conditions to adopt the euro. On the basis of this positive Convergence Report, the Commission has proposed to the Council that Cyprus adopt the euro on the 1st of January 2008. However, Joaquin Almunia, European Commissioner for Economic and Monetary Affairs cautioned that Cyprus must "continue to implement stability-oriented policies in order to safeguard its external competitiveness."

To become part of the euro area, a European Union country must satisfy multiple criteria set out in the EU Treaty regarding the government budgetary position, price stability, exchange rate stability and convergence of long-term interest rates. Compatibility of the legal framework with the Treaty must also be examined.

Cyprus had a budget deficit of 1.5% in 2006, down from 2.3% in 2005, a figure which had enabled the Council, acting on a Commission proposal, to close the excessive deficit procedure started upon EU accession, in 2004. For 2007, the Commission's Spring Forecast projects an almost unchanged deficit (1.4% of GDP). The government debt increased between 2000 and 2004 but has been on a declining path since 2005 to reach 65.3% of GDP in 2006. In 2007, it is seen declining further to 61.5% of GDP.

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