The government’s social policy has incurred a high cost since taking office in 2023, especially for implementing short-term emergency measures to tackle inflation.
Over the course of nearly a year, according to data from the Ministry of Finance, the state gradually depleted €256 billion from its coffers, nearly 1% of GDP, to support households and businesses whose incomes were affected by inflationary pressures, primarily focusing on extending the graduated subsidy scheme for electricity costs and reducing consumption tax on motor fuels.
Yesterday, President Nikos Christodoulides announced a new package of targeted measures worth €60 billion, while measures worth €196 billion had already been implemented in the previous period.
The President, in announcing the measures, stated that they are within the state’s fiscal capabilities and based on the stable developmental trajectory of the Cypriot economy.
The flexibility that the Christodoulides government has for economic and social policy comes at a favorable juncture, not only because there is fiscal space for the state to provide something to citizens as compensation for prolonged inflation, but also because the EU’s new fiscal rules are more lenient compared to previous ones. They allow more time for a milder reduction of public debt and deficits, without “choking off” development prospects and social cohesion.
Fiscal estimates for Cyprus until 2026 are already within the framework of the agreement reached for the reform of the Stability Pact, and there is even room for maneuver.
Cyprus is not the only European state implementing measures against inflation.
Even the ECB understands states’ moves for fiscal measures to support households and businesses in response to energy prices and high inflationary shocks, and it expects them to largely recede in the coming years.
According to a recent report by ECB technocrats, state measures amounted to 1.3% of GDP in 2023, down from 1.8% in 2022, and are expected to remain below 0.5% annually for the years 2024-2026.
As noted in the analysis, about two-thirds of the support measures in effect in 2023 are expected to expire in 2024, another 20% in 2025, and the remainder is expected to remain in force in 2026.
Of the measures announced, more than half pertained to energy price caps in Germany, France, and the Netherlands. ECB technocrats note that the share of subsidies as part of total energy and inflation support measures is expected to decrease significantly in 2024 and become negligible from 2025 onwards.
It is noted that the response to the energy price shock included compensatory measures targeting retail prices, such as energy price caps and other measures, which generally benefited all households or businesses.