Our View: Government’s economic policy driven by public pressure, not prudence

The way the government is carrying out economic policy should worry everyone. Although it claims that fiscal discipline and prudent spending are its priorities its erratic decisions do not really support its claim. This is a government that formulates economic policy in accordance with public demand, giving the impression that any group that shouts loud enough or steps up the criticism it will be satisfied. One day the zero VAT regime on certain items has to stop and few days later it is introduced for other items, because some people complained.

A demonstration of this slapdash economic policymaking was given in the last week. Within a few days of the zero VAT on basic items of consumption ending, as scheduled at the end of September, the government, bowed to the public criticism, and decided to introduce zero VAT to some other products. On Thursday morning, leaving an event in Limassol, Christodoulides, was asked about the criticism his government was facing about high prices. He said that on his return to Nicosia he would meet the finance minister and “one of the issues we will talk about is this.”

Straight after this meeting, Finance Minister Makis Keravnos announced there would be zero VAT on diapers for infants and adults, baby milk, female hygiene products, fruit and vegetables. No consultation with finance ministry technocrats about the cost implications, or about the items chosen for zero VAT, was required. The president, it seems, could not wait a few days for the list to be drafted by the ministry, even though council of ministers’ approval would be given this week, and the discount would probably be introduced at the start of next month. When there is public pressure, decisions are taken on the hoof, because the priority is to neutralise the criticism.

Even the justification for the measure was a bit confused although the main message was that the government was “strengthening the middle class.” Did the middle class, made up of overpaid public employees and SGO workers really need strengthening? What about the lower class – the tens of thousands on minimum wage and impoverished pensioners? Perhaps they fall under the rubric of “vulnerable groups” – also mentioned by Keravnos – which would be helped by cheaper nappies and female hygiene products.

Interestingly, when zero VAT regime was nearing its end, the finance ministry, quite rightly, defended the plan not to extend it by saying that rate of inflation had stabilised at a manageable 2 per cent, while energy and fuel prices had gone down. It added that state intervention in the market should be avoided over extended periods of time. It had a point considering zero VAT had been in place for over a year. As if to underline that the government does not practice what it preaches, Keravnos said that the latest zero VAT regime “has no specific expiry date.” Intervention in the market will be for an extended period.   

The head of the president’s press office, Victoras Papadopoulos, told CyBC radio on Friday that the government was constantly monitoring the movement of prices and whenever it was deemed necessary it intervened for support of “vulnerable groups”. The measures were considered necessary to support young couples (nappies and baby milk) and the elderly – at least those suffering from incontinence.

The measures did not silence Akel, which dismissed them, saying that “the large majority of society needs, here and now, a comprehensive plan for dealing with the high cost of living.” The government’s response was that the economy was doing extremely well – high growth rate, very low unemployment rate, reduction of public debt and upgrades of the country’s credit rating – which could not be disputed, and Akel had no right to criticise the government after the mess it had made of the economy under President Christofias. “They crushed the middle class, did not leave a piastre in state coffers, brought in the Troika, cut wages and CoLA,” said Papadopoulos, implying that Akel had no right to criticise with such a record.

The irony is that the Christodoulides government’s economic policies do not differ much from those of Christofias. The government has spent half a billion in support measures for households faced with high prices, according to Papadopoulos, while Keravnos boasted that spending on welfare benefits would reach €2 billion in 2025. The government also restored CoLA and gave across the board pay rises to public employees, with the public payroll expected to hit €4.3 billion next year – a 35 per cent rise since 2022. These are Christofias economics, the only difference being that the economy is in much better shape now.

Seeing that the government shapes its economic policy by public demand, 13 unions and consumer groups sent a letter to the president (before the latest zero VAT decision was taken) with suggestions for protecting workers and vulnerable groups from the high cost of living. They propose extension of the electricity bill subsidy, which ends this month, a reduction of the tax on fuel, subsidy of housing and student loans, increase in child benefits, single-parent families, student grants as well as full restoration of CoLA.

The danger is that the government, which has made bowing to public pressure its trademark, could actually give in.