Cyprus approves deficit-cutting budget

* Cyprus approves 2011 budget, deficit around 4.0 pct

* Shortfall below EU excessive deficit requirement

NICOSIA, Dec 16 (BestGrowthStock) – Cyprus’s lawmakers approved the
island’s 2011 budget on Thursday, which authorities said would
cut its fiscal shortfall to 4.0 percent of gross domestic
product, within an EU requirement under an excessive deficit
procedure.

The budget forecasts growth next year of 1.5 percent and
curtailing its public deficit to around 4.0 percent of GDP,
half a percentage point below EU calls it be cut to 4.5
percent.

The island nation has been told by the EU to incrementally
cut its deficit to below the euro zone threshold of 3.0 percent
by 2012. It is expected to hit 5.9 percent of GDP in 2010.

In a show of hands, parliament passed the budget in a
majority vote.

The budget has incorporated a 0.05 percent tax on banking
deposits exceeding 100,000 euros and introduces a 5 percent VAT
rate on foodstuffs and medication.

Cyprus has also pledged pension reform in its bloated
public sector, though it was forced to backtrack on one piece
of regulatory legislation when civil service unions threatened
a walkout last week, complaining they had not been consulted.
The government also said it would consider more ways to tax
wealth.

Standard and Poor’s lowered Cyprus’s sovereign rating one
notch to A last month, citing its large banking sector and
exposure to debt-ridden Greece.

The budget calls for spending of 8.02 billion and revenue
of almost 6 billion euros.

One economist said the budget did not go far enough in
addressing problems for the economy, the euro zone’s second
smallest.

“We have structural problems where spending is
disproportionate to the income received. It is protected and
enhanced by the labour unions,” said economist Stelios Platis.

“This budget is inadequate,” he said.

The government says it will start a dialogue with labour
unions next year to generate 35 million in savings. It is
likely to target slashing overtime pay, curtailing some
benefits and launch discussions on pension reform in the broad
public sector.

Economist Pambos Papageorgiou of European University Cyprus
said the budget provisions were more than enough to curtail the
deficit, but said that pension reform needed to be addressed.

“There has been a big increase in the number of civil
employees and their salaries in the past 20 years, so the
burden on state coffers will be immense in 20 to 30 years from
now. Realistically speaking, without changes this system cannot
be funded in the future,” he said.

(Reporting by Michele Kambas, Editing by Chizu Nomiyama)

Cyprus approves deficit-cutting budget