Q Cyprus has decided to enter the eurozone quite soon after EU accession. As part of this process you have embarked on an ambitious plan to balance the budget. Are you on track?
A The 2005 estimate for the fiscal deficit is 2.5% of gross domestic product [GDP], and the deficit forecast for 2006 is 2%. We are aiming to reduce it by about half a percentage point a year, and we think that we can reduce the number to 0.5% for 2009. We do not anticipate any new taxes, so we think that this can be done by buoyant growth and greater effectiveness in collecting tax revenues.
We have been a member of the Exchange Rate Mechanism II since May 2005. If you focus on the size of government debt, inflation, the fiscal deficit and stability of the exchange rate, we are on target with our plans to introduce the euro in January 2008.
Q How do people in Cyprus feel about joining the euro? Are there concerns about its effects, especially after the experience of other countries, where its introduction was seen by many consumers as a one-off chance to put up prices?
A Understandably there is some scepticism, but we believe that with the help of an effective communications campaign, which we are launching with the help of the EU, and in close association with Ireland and some other countries, we will be able to convince people that their scepticism is unfounded. We certainly want to make good on our promise that there will be no unjustified rounding up of prices.
Q You have managed to make cuts in government expenditure. After your initial successes, will making further cuts become more difficult?
A We put explicit ceilings on current and development expenditures, and at the first stage we did this across the board, so after this it will be difficult to put in place further decreases across the board. What we need to do now is look at areas where there is too much current expenditure, too much employment, and shift resources around to priority areas.
Like other countries, we need to address carefully the ageing population issue, and the long-term impact this will have on public finances, and make sure that the environment for the private sector remains good. We need to be intelligent about our expenditure policy.
That means maintaining the social protection system, while increasing expenditure in areas such as research and development, education and some forms of infrastructure. My own philosophy is that you should have a good business address, and low taxation, but avoid putting in place wasteful government programmes.
Q How are your efforts to make the tax collection system more efficient coming along?
A We are in quite good shape because we project that over a two-year period our revenues will increase by 20%. Strong GDP growth has fuelled the buoyancy of value-added tax and income tax receipts. But we want to improve the effectiveness of the tax collection system, particularly from self-employed professionals and small businesses. The strategy is to keep tax rates low but broaden the base.
Q Is the high price of oil a challenge to your economic planning?
A The high price of oil has, of course, impacted upon inflation. High oil prices affect more open, energy dependent economies than Cyprus. But I would add that up to now many people have not factored the high cost of energy into their customs and habits. For example, the way houses are built, and the number of cars that people own.
The increase in the price of petroleum products has also increased awareness of the importance of energy conservation. We have been careful not to distort the price message by keeping prices to consumers lower than they needed to be, by either reducing taxation or subsidising energy, though we have spent a very modest amount on heating oil for low income groups.
