The health crisis caused by the pandemic of the new coronavirus continues around the world, as well as the economic crisis, since the whole planet is on pause, almost a year now. “How much longer will the government, here in Cyprus, be able to financially support companies and private sector workers? How many more strengths does the Cypriot economy and the state budget have? ” The chairman of the Financial Council, Dimitris Georgiadis, was asked in an interview he gave to “P”. There is no expiration date for a government to react, Mr. Georgiadis replied, adding that the current situation will change. “Not only in terms of the pandemic and its effects on the economy, but also in the measures that the government can take, such as for example the government to proceed with new borrowing, increase revenues or reduce expenditures or some combination. The essence is to analyze the data and react in time, to weigh the direct and indirect, short-term and long-term effects “he added.
The question often arises, why should the crisis be paid for again by the private sector and not be shared. Civil servants got increases… What is your opinion?
Because the issue is very sensitive but also important, let me start with some clarifications. The final decision is purely political. If, when and to what extent. Also, any intervention in revenues at this time has nothing to do with a possible necessary correction in earnings in the public sector. Today we are talking about a temporary contribution of society as a whole to deal with an emergency. The main argument against any reduction in earnings is that it will negatively affect consumption at a time when realities dictate just the opposite. Unfortunately, this perspective often causes us to become overwhelmed when it's time to start a new day. Most people look at everything from their own perspective and ignore other important facts and factors. If one considers that the government will simply proceed with a general reduction in earnings, then yes the impact on consumption will be negative. But this intervention will not be done just to reduce the earnings and to say “the civil servants also paid”. It will be done for two main reasons:
- To maintain the ability to service the public debt and to avoid the need to impose even more painful measures in the future, something we all experienced in 2013.
- Also more importantly, if the reduction in earnings is done rationally, the impact on consumption will be positive and not negative as projected. It will be positive, if and when income is transferred from those who in the specific period save to those who have been significantly affected, ie negatively, their incomes. The consumption trend of the latter is clearly higher. A euro to someone with high earnings is more likely to end up in savings, while a euro to someone who closed their store would be more likely to end up in consumption.
This is Cyprus
If what you say is true that income transfer would boost consumption while now what we see is for some groups to increase savings and for others to reduce consumption, then is the government late?
Not necessarily and I am not able to answer it with certainty. A government will certainly take into account the possible reactions of those who will be negatively affected. This is our political system. But what is also important is the next day. Do not make businesses and households addicted to state support, thus causing bigger problems in the future. If it becomes the rule that the government will cover lost incomes, and even a large percentage, then many will be disincentive to return to work. Entrepreneurs will choose to maintain an otherwise unsustainable activity and subsidies, rather than innovating or diversifying. As I said, we all tend to analyze situations from our own point of view. We all highlight our needs and requirements, and explain why we should not contribute ourselves and others should. It seems that the Ministry of Finance estimates that with the current reserves, it could provide the necessary support without threatening the sustainability of public debt and without the need to reduce earnings in the public sector or elsewhere. But as time goes on, this possibility is limited. I will stress it constantly, this is a purely political decision. In the event that debt sustainability is threatened, there will certainly be intervention by the Council.
Contribution, conditions
If so, how should this contribution be made?
There are a number of conditions for this policy to succeed:
- There must be evidence of which groups have not been adversely affected by the crisis and it is not just the public sector. We have seen, for example, increases in the financial sector, at the same time as rating agencies are highlighting serious problems in the sector. It also seems that the pandemic has increased the incomes of some groups engaged in e.g. in the supermarket and health sector. It should be found or at least considered whether there is a practical way for everyone to contribute. Probably does not exist. The government should see this at a technocratic level. Furthermore, the contribution could be made by imposing a type of tax in stages for everyone. But many in the private sector will say “but my income has already decreased by X%, will I now pay tax?”. Unfortunately, whatever is decided, some will feel wronged. We are in a state of war and everyone has to contribute, and it is important to make an effort to get the measure accepted by society as a whole and to explain why. If everyone keeps their reserve, the battle will be lost and the damage will be greater for almost everyone.
- Another point is that the income of people employed in pandemic treatment centers should be avoided. Let me be clear, not in the whole health sector. Even if the rewards of some of them are excessive, their reduction may affect their efficiency and generally the effective treatment of the pandemic, something that should be avoided. If for practical reasons the imposition of a reduction would be universal, a targeted benefit could be set solely for those directly involved in tackling the pandemic.
- It is also important how the decision will be taken by all citizens. If it will be considered as a revenge measure of panic, e.g. “To get the government to the point of reducing public sector earnings, things are very bad” or “it has succumbed to the pressures of entrepreneurs”, then the negative climate will have a similar impact on consumption. But if it is perceived as a prudent policy, which aims to distribute the burden of the crisis to a practically feasible extent, in order to strengthen the position of the state, in order to continue the measures of state support without threatening the possibility of servicing the public debt, then the benefit will be manifold. The increased degree of confidence, in addition to boosting consumption and investment, will maintain the ability to raise liquidity at low cost.
The role of politicians
So the government was late?
For two reasons you will not hear a Cabinet often make this finding. The first is not in our terms of reference. These, as I have said, are purely political decisions. The second is that the Ministry of Finance and the political leader have more data and a more global picture of society at their disposal. They may take into account factors that have nothing to do with budgetary costs. We record the risks, the arguments and the facts. In this way I believe we are contributing to the public debate and also increasing the political costs that a minister or a government will incur in the event of wrong decisions.
If a Fiscal Council cannot have a practical effect and simply expresses views that can easily be easily ignored by politicians, what is the reason for its existence?
The point you make is almost always on the agenda of the EU Financial Council debates. Whether these bodies should have executive power and if so, on what issues and to what extent. The first point is that in most EU Member States the institution is new. It was created in response to the crisis of 2007-2008. As expected, and I personally consider it right, initially the terms of the order were limited. Fiscal policy issues should not be completely defined at a technocratic level. Political crisis-intervention has always been and remains necessary. But we have many examples of bad political decisions. As in many other issues, we will have an ongoing dialogue on the degree of flexibility that politicians should have and how it will be limited by technocratic bodies. We see that monetary policy is completely out of the hands of politicians. I do not expect, and I do not think it is right, that this should be done to the same extent for fiscal policy. Another factor that will determine the powers of the Fiscal Councils is the future development of the EU. As long as it proceeds to full social and economic integration, then the mechanism of financial control and supervision will inevitably be strengthened. This support is most likely to be made in part through the granting of more powers to the Fiscal Councils. Finally, I would say that it is still too early to determine the necessity of the institution of the Fiscal Councils. But this is better judged by others. It is very dangerous for democracy for technocratic institutions to decide on the extent of their own powers.
Addiction – Sustainability
You mentioned a possible addiction to state support. At the moment, the state financial support concerns all companies – viable and not. Is this done correctly?
As soon as the crisis broke out, the government had to react immediately. It may not have had the luxury of defining criteria and mechanisms that would separate sustainable businesses. As time goes on, this should be done more and more. Supporting unsustainable businesses, in addition to the problem of addiction, has other negative effects. It limits the funds available that could be effectively spent elsewhere or unnecessarily increase debt. They cause problems for healthy companies that have competitors, doomed companies that usually follow unfair offers. Most importantly, barriers to innovation and diversification are subsidized. Where an entrepreneur would look for new solutions, he maintains a doomed activity simply to collect subsidies. The general rule is to support a viable business with temporary liquidity problems.
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