Article 9 of the Constitution of the Cyprus Republic states that “Every person has a right to a decent existence and to social security”. The aim of this article is in line with the preamble to the US constitution, which calls for “promoting the General Welfare” of the people. And according to American Nobel Laureat Joseph Stiglitz this means “not just the welfare of the 1 per cent, but the welfare of all”.
Indeed, President Nikos Christodoulides, his advisors and EU and IMF officials need to realise that the ultimate objective of government policies is to improve the well-being of Cyprus citizens. But unfortunately, the Christodoulides administration’s touting of macroeconomic statistics such as on GDP growth and government surpluses as demonstrating successful policy management on the economic front is misleading and very illusory. The economic well-being of citizens cannot be measured just by GDP. Data on developments in the incomes and expenses of ordinary people, their net wealth positions and whether they are living in an environment, which is being preserved for future generations, need to be assessed in order to determine the success of economic policies.
In addition, success in achieving aims of the Cyprus constitution, at least on the economic front, depends on the political power of ordinary residents in shaping economic policies.
Developments
More specifically, over recent years from 2015 onward GDP growth in Cyprus has not coincided with an improvement in the economic well-being of most of its residents. In fact, increasingly higher proportions of GDP have gone to profits with their share rising from 21.2 per cent in 2015 to 29.0 per cent in 2023 as in particular banks, hoteliers, supermarkets and energy companies raked up higher profits. Over the same period the compensation of employees as a share of GDP declined from 44.2 per cent to 41.0 per cent, as the majority of employees experienced falls in their real disposable incomes. And within the labour market it is mainly only the highly paid public sector and bank employees that have benefited considerably from government policies and the power of their unions.
Moreover, the implicit growth model of the government promotes consumerism, mass tourism and “luxury” property development, which is increasingly turning Cyprus into a low productivity/wage economy, that especially is making it difficult for younger persons to secure decent well-paid employment and to raise families. In fact, most jobs in the retail, hospitality/tourism and construction sectors are relatively unskilled, offer low wages and are unattractive to most Cypriots. Even public sector institutions, which are the major source of employment for young people, give jobs to many unqualified persons at relatively low salaries meaning that a large number of highly skilled persons are forced to be underemployed in the private sector, remain unemployed, or emigrate. Notably, Finance Minister Makis Keravnos stated recently that “32 per cent of civil servants are low paid and 44 per cent are paid below the average median wage”.
Furthermore, with property development and consumerism in the form of purchases of fossil-fueled motor cars being in full flight, mass tourism exhausting water and energy supplies, and the government dragging its feet in taking action to combat climate change, the natural environment is being significantly damaged, thus making a mockery of commitments to protect the environment.
What can be done?
Christodoulides was elected president to serve Cyprus residents in accord with the Constitution of the Republic. However, it appears that the president – and his entourage of advisors, government officials and favoured business collaborators and their relations and friends – are more interested in enriching themselves with political power and financial gains facilitated by securing important positions and lucrative contracts, than in working to improve the well-being of all Cyprus residents.
At the same time, the very few of the political and business “elite” have succeeded at shaping the rules of the game, such as in taxation policies, to favour themselves at the expense of the vast majority.
Business as usual cannot continue and the government must use its key policy instruments, such as its annual budgets, and the strict and unbiased enforcement of laws and regulations to undertake concrete action to enhance general welfare including preserving the natural environment.
Budget policy should aim at redirecting the economy’s resources to investments in soft and hard infrastructure including greater outlays for the green transition and in the care economy, while constraining unproductive current expenditures such as placing persons on the government payroll for political purposes.
In this connection, the government should not be targeting unnecessary budget surpluses and piling up over €5 billion of cash at banks, but should be spending more on research and development and enhancing the quality of public services. And expenditure on the digital transition needs to be accelerated so that, among other things, social benefits can be better targeted and promptly distributed to deserving persons.
Taxation policy has been used by the government to promote inefficient resource allocation to certain economic sectors. In particular, taxes on the purchase, transfer, inheritance and ownership of property are minute by EU standards and have contributed to periodic excesses in property construction in Cyprus, especially at the high end of the real estate market. Thus, a compelling need exists to introduce at least a progressive recurrent tax on immovable property so as to slowdown luxury property development and shift investments to other areas, including the building of affordable housing and renewable energy storage facilities in cooperation with the government. In addition, to deter companies from making abnormal profits from non-productive activities, such as banks making huge financial gains from interest on their deposits at the ECB, consideration should be given to levying a tax on such excess profits.
And raising the progressiveness of personal income tax rates should be deployed to increase the take-home pay of lower and lower middle-income persons. These tax rates have not been adjusted since 2008. Undeniably, there is a crying need to raise tax-free threshold on annual personal incomes from the present €19,500 to say €23,500 to take account of the impact of inflation on incomes over the last 15 years.
Moreover, the efficient allocation of resources can not be left to private markets in Cyprus, which are heavily tainted by the authorities’ gross tolerance of corruption, tax evasion and the non-payments of debt, that contribute to the lack of genuine competition. Indeed, many of society’s problems in Cyprus, from excesses of pollution to financial instability and economic inequality, have been created by markets and private entities, including most notably property developers and banks. Markets alone can’t solve these problems since it is mainly the role of the government to protect the environment and ensure social and economic justice as well as promoting a dynamic, genuinely competitive business environment.
But, in attempting to solve the aforementioned problems of society it will be necessary for laws and regulations of Cyprus to be strictly and even-handedly enforced. Issues of building permits should comply with environmental regulations and violations resulting from actual property developments severely punished. Furthermore, serious efforts must be made to combat tax evasion, that not only cheats the government out of revenue, but distorts the playing field for businesses, through inter alia taking legal action against prolific corporate and professional tax evaders. And for exercising prompt and effective action against public officials engaged in corruption, laws should be rewritten and made clear. For example, a new or rewritten law could read “An employee may not use his public office for his own private gain or for that of persons or organisations which he or she is associated”.
Finally, to achieve the aims of the Cyprus Constitution it is very important that regulations and policies relating to the well-being of lower-income households are addressed. There is an overriding need to ensure that regulations on minimum wages and working conditions are strictly enforced by the government and closely monitored by unions. In addition, regular adjustments in minimum wages should be made to take account of cost-of-living changes for lower income households.
And in this context, it is argued that one of the successes of the Joe Biden administration is that it has used fiscal stimulus to promote job growth and low unemployment, that in turn has strengthened the bargaining power of private sector workers to gain real wage increases and to enforce labor laws to improve work conditions. Indeed, this feature of “Bidenomics” contrasts strikingly with the fiscal austerity of the Christodoulides administration that reflects an uncaring attitude toward private sector workers and an irresponsible obsession with generating surpluses.
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
