Cyprus to cut deficit, debt

NICOSIA (Reuters) – Eurozone hopeful Cyprus produced improved deficit and debt reduction forecasts in its 2007 budget yesterday as preparations for adoption of the euro by January 2008 entered their final stage. Cyprus expects its budget deficit to fall to 1.6 percent of gross domestic product in 2007 from an anticipated shortfall of 2.0 percent this year. Public debt was expected to fall further to 64 percent, officials said. «This will be the third straight year that Cyprus will satisfy all five Maastricht criteria,» said Finance Minister Michalis Sarris, referring to EU regulations which must be followed before a state can adopt the euro as its currency. Cyprus, which saw hopes of earlier eurozone entry frustrated by spiraling deficits, has been in the ERM2 exchange rate mechanism since early 2005. The Cyprus pound is expected to be permanently locked in against the euro for conversion purposes in «June or July» of next year, according to Sarris. The island’s Cabinet approved yesterday a state budget putting 2007 spending at 4.06 billion pounds (7.05 billion euros) on revenues of 3.31 billion. Ministries should show restraint on submission of budgets to Parliament for supplementary funds, a Cabinet minister said. The budget requires approval by Parliament. Forecast revenue was up an estimated 10.7 percent on buoyant economic growth which is seen as matching the 2006 estimate at 3.8 to 4.0 percent. No new taxes were expected, said Sarris. «It’s ruled out,» Sarris said in response to a question. The Mediterranean island has typically shied away from imposing direct taxation to cut deficits and Cyprus faces presidential elections in 2008. Its hole-plugging tactics in the past three years have been to claw back revenues from tax dodgers, and Sarris said economic growth was a key element to the replenishment of public coffers. «Economic growth rates of 4.0 percent means that VAT, income tax and capital gains tax revenues will also rise which has helped us reduce deficits and public debt,» said Sarris. Public debt was expected to fall to 64 percent of GDP from 67 percent, while authorities had set a long-term horizon of cutting the figure down to 53.5 percent by 2009. Risks underpinning the economy were seen in pressure for the submission of supplementary budgets and continued delays in reforming the island’s creaking social security system, a report presented to Cabinet said. Economists have repeatedly said Cyprus needs radical reforms to its social security system to counter the effects of an aging population and safeguard its pension system from tipping into a deficit after 2025.