The Cyprus Fiscal Council recommends particular caution in public finances due to increased risks, which may persist over time, believing that support measures should be targeted at small and medium-sized enterprises and vulnerable groups of the population rather than at the entire population.
“The scope of fiscal policy is not unlimited and horizontal measures are as counter-productive as they are ineffective and unnecessary, despite their popularity,” the Council said in its interim report released on Thursday.
The Council believes that in the aftermath of Russia’s invasion of Ukraine, “inflationary and employment pressures will continue, while at the same time increases are to be expected in some of the indicators of inequality”.
According to the Fiscal Council, the current economic climate does not imply a high fiscal risk and the control exercised by the Treasury does not raise concerns at this stage, while noting that “in the current circumstances, fiscal policy is the growth and inflation in the same direction, the relief and budgetary support measures being inflationary and the deflationary measures being recessive”.
“Actions would better focus on social implications, including job protection, while providing specific and targeted protection to groups of the population who are socially vulnerable to price increases,” the Council said, adding: “At this level, the protection of small and medium enterprises and the social support of vulnerable groups must be considered as categories where an increase in public expenditure is legitimate.”
According to the Council, “the fact that the inflation currently recorded is not a monetary event, but that it is due solely to external shocks, excludes any political option and renders ineffective any measure aimed at horizontally reducing price levels” .
Therefore, he adds, “particular caution and restraint is advised in decisions that do not aim to relieve vulnerable households and businesses, and in particular in horizontal measures. Measures that constitute fiscal expansion may at first glance look like inflation-fighting measures, but in fact they exacerbate it, with all that that entails.
With regard to inflation, the Council considers that, although the estimate of inflation, which sets the threshold at 4.5%, is statistically sound on the basis of the assumptions on which it is based, prudence s imposed in the interpretation of the figure. He expects inflation to move slightly above the Treasury’s estimate, breaking through the 5.5% threshold, assuming fuel prices slow from the end of the third quarter of 2022.
With regard to GDP growth, the Fiscal Council notes that the growth rate should evolve at a real rate close to 2%, with nominal GDP maintained at close to 7%.
In addition, Council reiterates that the persistent delays in the implementation, in particular of the Recovery and Resilience Plan (PRR), constitute a major weakness in the Government’s plans.
“The continued delay in the implementation of the PSR will lead the Fiscal Council to an unfavorable revision of the growth and unemployment projections”, he underlines.