Finance Minister Constantinos Petrides categorically rejects the package of AKEL-DIKO-DHIPA proposals for electricity and fuel, stressing that they are by definition inflationary, will increase inflation in Cyprus and will cost 300 million euros annually.
In a written statement, the Finance Minister said, among other things, that at least three of the proposed laws are contrary to the European acquis, especially Articles 73, 85, and 86 of Directive 2006/112/EU).
The Minister himself responds with the following eight points why the Government disagrees:
- Tax deductions amount to fiscal expansion and are by definition inflationary.
- Too often VAT reductions are not reflected in prices, and do not serve vulnerable groups of the population. Instead, the loss of government revenue may be used to create conditions of obscenity, with no social benefit to vulnerable groups and the low paid.
- If the purpose is to serve the relief of households and businesses, i.e. the pursuit of social policy, these legislative proposals will have the opposite effect. The greatest benefit from further tax cuts will be passed on to the largest electricity consumers, taking advantage of the loss of revenue from the state. Large consumers in particular should be under pressure to reduce their electricity consumption, so that there is pressure to reduce inflation and the inequalities it creates through their high consumption, rather than becoming the biggest beneficiary of the tax cut policy. By extension, these proposals to further reduce VAT on electricity will have a strong anti-social character at the expense of lower income groups. This is a position almost all economists and the Fiscal Council point out in their entirety.
- Compared to the rest of Europe, electricity taxes, fees and network costs amount to 49 % of the final price, compared to 63,1 % in the rest of the euro area according to Eurostat. Despite this, the government has cut VAT on electricity from 19% to 9%, and for the vulnerable to 5%, and has also cut excise duty on fuel by around 9 cents a litre, the lowest rate allowed by the E.U. Further, across-the-board cuts will simply have more inflationary effects and increase inequalities.
- The high electricity price is not due (based on the above) to taxation which is one of the lowest in Cyprus but to the dependence on fuel oil. It is for this reason that the government in the coming years has budgeted significant funds for the increase of RES, and recently through the 14 proposals for dealing with the consequences of the pandemic has significantly increased subsidies for the installation of photovoltaic systems. This is a more coherent policy aimed at the root of the problem. In other words, to decouple, especially the most vulnerable, but also businesses from fossil fuels, rather than draining fiscal reserves in the short term and without any particular benefit.
- Further tax reductions are a disincentive to avoid wastage in electricity, which is contrary to the EU and Cyprus' green transition objectives.
- The legislative proposals cost approximately 300 million Euros per year (142 million per six months), placing a significant burden on public finances, without, in our view, serving any social benefit as they create distortions.
- At least three of the proposed laws are contrary to the acquis communautaire[/B] and in particular to Articles 73, 85 and 86 of Directive 2006/112/EU)
In conclusion, the Minister of Finance notes that the implications of the proposed legislation will have the following effects:
- the reduction of government revenues at a difficult time when government revenues are reduced due to the slowdown in growth and inflation.
- the further increase in inflation
- The creation of a further need for further support for the vulnerable in the future due to the increased inflation created by the measures themselves, making these parallel policies fiscally risky without an appropriate impact on society.
"Horizontal, untargeted and without any impact study, the proposals hamper the government's efforts for targeted, socially sensitive and effective policies that will most benefit those in need. The Government has already adopted two packages of measures to mitigate the effects of the war in Ukraine and inflation, with 14 measures totalling €300 million. The latest policies include support for pensioners, households with dependents and children, people with disabilities, VET recipients, support for agriculture and livestock, and tuition subsidies for children," it says.
It is these layers of people, he adds, that we want to serve, not adopt policies that favour big consumers, big interests or that allow others to bear the benefit of revenue cuts instead of the vulnerable. For these reasons, he concludes, the parties' proposals affect macroeconomic stability without being able to bring about the desired outcome and therefore cannot be accepted.
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