Stability programme of Cyprus, 2007-2011 - Main contents

EN

Official Journal of the European Union

C 73/10

On 4 March 2008, the Council examined the first stability programme of Cyprus, which covers the period 2007 to 2011 (2).

Over the last ten years, Cyprus has been characterised by solid economic growth, albeit with fluctuations in some years, which reflect exposure of the small open economy to external shocks.

Fiscal policy has not always taken advantage of favourable cyclical conditions to achieve budgetary targets close-to-balance or in surplus, which would provide a safety margin to normal fluctuations, and allow automatic stabilizers to operate fully in economic downturns. This highlights the need for avoidance of pro-cyclical stance in good times. In the last four years the Cypriot authorities embarked on a successful, mainly, revenue-based fiscal consolidation, which brought the general government deficit from 6,5 % of GDP in 2003 to 1,2 % in 2006. On the back of a likely transitory tax-rich composition of growth, which brought about exceptionally high government receipts, the budget balance is currently estimated at a surplus of 1,5 % of GDP in 2007. Furthermore, debt declined from a 69 % of GDP in 2003 down to about 60 % in 2007. The limited primary current expenditure restraint and the likely transitory character of composition effects in the recent increase in tax revenues, highlight the need for further improvements in expenditure control. This would help to stabilise the economy in the new context of euro area membership. The reform of the pension system and a timely implementation of the adopted reforms in health care would also contribute to the control of primary spending, while underpinning the sustainability of public finances in the long run.

The macroeconomic scenario underlying the programme envisages that real GDP growth will moderate slightly from 4,2 % in 2007 to some 4 % on average over the rest of the programme period. Assessed against currently available information (3), this scenario appears to be based on plausible growth assumptions until 2009, while they appear to be slightly on the high side thereafter. The programme's projections for inflation appear realistic but on the backdrop of the latest developments in oil and food prices at international level, the balance of risks is somewhat tilted on the upside.

For 2007, the stability programme estimates the general government surplus at 1,5 % of GDP, more than 3 percentage points of GDP better than the target of a deficit of 1,6 % of GDP set in the last update of the convergence programme. The marked turnaround in 2007 is attributed to exceptional rise in total revenues, due to especially high tax receipts brought by the strong profitability of the financial sector and the booming investment in real estate. Part of the increase in tax bases and in the associated revenues does not appear to be permanent. The 2007 estimated outturn respects the invitation in the Council opinion of 27 February 2007 on the last update of the convergence programme (4) to ‘implement the fiscal consolidation path as foreseen in the programme’.

In view of the better-than-expected 2007 outturn, the budgetary targets presented in the stability programme are much improved...