Council Recommendation on national reform programme 2011 for Cyprus / Delivering a Council opinion on updated stability programme

16 July 2011

The Council is of the opinion that the macro-economic scenario underpinning the budgetary projections is plausible until 2012, but rather favourable thereafter, as assessed against the Commission services' spring 2011 forecast.

The stability programme aims to reduce the budgetary deficit to 4 per cent of GDP in 2011 and 2.6  per cent in 2012, in line with the Council Recommendation of 13 July 2010, and to continue consolidation afterwards. The programme projects the debt ratio to peak in 2012 and to decline thereafter. The annual average improvement in the structural balance for the period 2011-2012 is 1.5  per cent of GDP, in line with the Council Recommendation of 13 July 2010. However, the structural improvement is set to be below the requirements of the Stability and Growth Pact in both 2013 and 2014. The medium-term objective (MTO), which is reaffirmed as a balanced budget in structural terms, will not be reached within the programme period. While the overall adjustment planned is based on expenditure restraint, most measures in 2011 are on the revenue side. Overall, there are downside risks to the consolidation path mapped out in the programme, associated with the continued rebalancing towards a less tax-rich growth pattern, the practice of adopting supplementary budgets during the course of the year and the timely implementation of measures which are still to be agreed with the social partners and others still to be specified (e.g. containment of current expenditure). In view of these risks, additional measures may need to be adopted if macro-economic or budgetary developments turn out to be worse than expected.

The stability programme aims to reduce the budgetary deficit to 4 per cent of GDP in 2011 and 2.6 per cent in 2012, in line with the Council Recommendation of 13 July 2010, and to continue consolidation afterwards. The programme projects the debt ratio to peak in 2012 and to decline thereafter. The annual average improvement in the structural balance for the period 2011-2012 is 1.5 per cent of GDP, in line with the Council Recommendation of 13 July 2010. However, the structural improvement is set to be below the requirements of the Stability and Growth Pact in both 2013 and 2014. The medium-term objective (MTO), which is reaffirmed as a balanced budget in structural terms, will not be reached within the programme period. While the overall adjustment planned is based on expenditure restraint, most measures in 2011 are on the revenue side. Overall, there are downside risks to the consolidation path mapped out in the programme, associated with the continued rebalancing towards a less tax-rich growth pattern, the practice of adopting supplementary budgets during the course of the year and the timely implementation of measures which are still to be agreed with the social partners and others still to be specified (e.g. containment of current expenditure). In view of these risks, additional measures may need to be adopted if macro-economic or budgetary developments turn out to be worse than expected.

The Council  recommends Cyprus to adopt the necessary measures of a permanent nature to achieve the budgetary target in 2011 and the correction of the excessive deficit by 2012, in line with the Council recommendations under the EDP. Take measures to keep tight control over expenditure and make use of any better- than-expected budgetary developments for faster deficit and debt reduction. Ensure progress towards the medium-term objective by at least 0.5 per cent of GDP annually and bring the public debt ratio on a downward path. Accelerate the phasing-in of an enforceable multiannual budgetary framework with a binding statutory basis and corrective mechanisms, as from the preparation of the 2012 budget. The programme and performance budgeting should be implemented as soon as possible.

The Council  recommends Cyprus to improve the long-term sustainability of public finances by implementing reform measures to control pension and healthcare expenditure in order to curb the projected increase in age-related expenditure. For pensions, extend years of contribution, link retirement age with life expectancy or adopt other measures with an equivalent budgetary effect, while taking care to address the high at- risk-of-poverty rate for the elderly. For healthcare, take further steps to accelerate implementation of the national health insurance system.

Council Recommendation


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