Management of Cyprus economy impoverishing many households

In managing the Cyprus economy, decision-makers focus on real GDP growth and whether the government is generating surpluses. Indeed, government officials backed by the European Commission, the IMF and numerous credit rating agencies, base their assessments that trumpet the good performance of the Cyprus economy and policy decisions on statistics showing positive real GDP growth and reductions in the government debt to GDP ratio.

However, the government largely neglects giving consideration to metrics indicating how the economic and social well-being of most Cyprus citizens are faring, including the extent to which their incomes are being eaten up by inflation including housing costs and regressive taxation.

Population by income class

The recent publication of Cystat on ‘Population by Income Classes’ includes statistics on economic and social characteristics concerning the Cyprus population by income class (upper, middle, lower) based on their equivalent disposable income, as well as a profile of each income class in relation to their activity status, household type and age groups.

In reviewing these statistics it is important to stress that the data presented for specific years refer to the year of the survey, which is based on the data for the previous year, meaning that statistics presented for the latest year, 2023, in fact, refer to actual data or outcomes for 2022.

These income statistics indicate that the relatively rapid growth of real GDP has not been associated with significant increases in the average real incomes of persons in the lower, middle and upper classes of Cyprus.

While real GDP per head rose by 17.1 per cent between 2010 and 2022, real incomes of the lower, middle-and-high income classes are estimated to have increased by just 0.1, 0.9 and 2.85 per cent, respectively, over these 12 years.  

Notably, these income statistics show, among other things, that 28 per cent of the population were in the lower income class in 2022 and that half of these persons had incomes below the poverty level of less than €1.000 per month. Indeed, they reveal a widening of income inequalities and the impoverishing of many households.

While these estimates do not show great differences between developments in the real incomes of the higher and lower income classes that are based changes in the consumer price index (CPI), it should be realised that the cost of living for the lower income persons have risen at a much faster pace than the CPI, because these people spend higher proportions of their incomes on items such as food and groceries, water and electricity than higher income households, meaning that real incomes of lower-paid persons most likely declined.

Furthermore, with their real incomes sinking to lower levels these statistics reveal that many households cannot afford to service their rent and/or debt payments. Indeed, by 2022 it is shown that 31.6 per cent of lower income persons were late on making such payments compared with 1.2 per cent for high income persons.

Low-income persons are spending greater and increasing proportions of their meagre incomes on housing costs, that is, 16.9 per cent in 2022, compared with 10.3 per cent for high income persons.

Persons with lower incomes had a much higher unemployment rate of 8.2 per cent in 2022, than persons in middle-and higher-level income brackets, which averaged less than 2.5 per cent in 2022.

Although, unfortunately, the Cystat publication reveals no breakdown of income data between public and private sector employees, the  proportion of the population of around 12 per cent earning incomes between €28,000 and €38,000 per annum, the so-called upper middle class, suggest that many persons in this group are public sector and bank employees, while non-bank private sector employees constitute overwhelmingly the bulk of lower and lower-middle income persons.

Developments in personal incomes from 2010 to 2022 confirm the trend of older generation of persons, particularly those in the 45 to 64 years age group, increasing their income shares relative to those of the younger generations.

In contrast, lowly-paid pensioners and households with three or more dependents are disproportionately concentrated in the lower and lower-middle income brackets.

Policy analysis and recommendations

In sum, the statistics of the Cyprus population by income classes convincingly do not support the trickle-down economics theory, implicitly supported by the top officials, including the Minister of Finance, that if the economy grows, everyone will benefit.

Income inequality has widened, particularly for workers dependent on private sector incomes.

Furthermore, the economic and social characteristics of persons in the lower income classes indicate that economic growth can’t be equated with social progress, at least for Cyprus in recent years.  

As a caveat it can be argued that strong GDP growth has contributed significantly to bringing down the unemployment rate since 2015, but it can be countered in that most of the jobs created carry low incomes.

The government’s fixation on producing sizable surpluses is not benefitting most citizens of Cyprus. Credit rating agencies upgrade the rating of governments not because their economies are performing better, but primarily owing to there being less risk that a government will default on its debt repayments.

Credit upgrades may enable the Cyprus government to reduce interest rates on its borrowings. However, this benefit is hardly relevant at present when the government is aiming to steadily reduce its debt to GDP ratio and has over €5.5 billion in deposits at banks that could be called upon to repay debt.

Thus, the government with its fiscal policies needs to refrain from taking money out of the economy with its obsession of generating surpluses, but should raise the quality public expenditures so as to enhance the social-economic welfare of its citizens.

More specifically, social protection expenditures for pensioners, families with dependents, and for vulnerable persons need to be increased to bring their incomes to levels enabling a decent standard of living.

Notably, social protection expenditure in Cyprus in 2022 amounted to just 11.8 per cent of GDP, whereas the average for other euro area countries was a much higher 19.9 per cent.

Also, the government should invest more in the care economy providing affordable facilities for the care of children, the elderly, and the mentally ill.

In addition, there is a compelling need for government expenditure and taxation policies to support the creation of economic activities that are competitive and create decent higher-paying jobs.

More government outlays for research and development projects should be made, providing employment to highly skilled youth. And investment in implementing the green and digital transitions should be accelerated employing technology requiring skilled personnel.

Furthermore, resources in the construction industry need to be redirected from the building of more luxury apartments to the construction and renovation of more affordable housing units in line with the urgent formulation of a comprehensive housing policy.

To ensure adequate resources for a substantial increase in quality spending by the government and to boost the disposable incomes of lower and middle-income persons, reform of the tax system of Cyprus and its chronic administration is urgently required.

The regressivity of the tax system needs to be decreased by reducing the VAT on electricity consumption and essential food products, together with making the structure of personal income tax rates more progressive.

The latter tax rates have not been changed since 2008 and in particular the tax-free threshold of an annual income of below €19.500 needs to be raised to at least €23.000 to take account of the impact of inflation on incomes over the last 16 years.

Undeniably, it is scandalous that Cyprus is one of the very few EU countries that have not adjusted personal income tax rates for inflation at regular intervals since 2008.

Furthermore, the Cyprus authorities must monitor carefully and ensure that labour market regulations including the payment of minimum wages and agreed cost of living allowances and 13^th salaries are implemented.

In fact, one reason for the marked divergence between GDP and personal income growth is that many employees, such as of hotels, are exploited and are not being remunerated according to their productivity, with excess profits being syphoned off to business owners.

Finally, it can be concluded that with the government focused primarily on GDP growth and on budgetary surpluses in assessing the performance of the economy and in its policy decisions, while giving minute consideration to the deteriorating well-being of many of its citizens, the Cyprus authorities are acting and behaving irresponsibly toward their citizens.

And this conclusion is based on income developments up to 2022, a period being followed by up to now a further worsening of the economic and social conditions of the persons in the lower and lower-middle income classes according to anecdotal evidence.  

Leslie G Manison is a former senior economist at the International Monetary Fund, an ex-advisor in the Cyprus finance ministry and a former senior advisor at the Central Bank of Cyprus