The Chairman of the Fiscal Council, Andreas Charalambous, emphasized the need for social policy measures to be more targeted so that state support actually reaches those who need it most. Speaking on the Alpha News program, he also raised the issue of the effectiveness of horizontal interventions, while warning that chronic delays in energy planning make Cyprus particularly vulnerable whenever there is turmoil in international markets.
Mr. Charalambous initially focused on the Cypriot economy’s dependence on conventional forms of energy, linking it to the intensity with which international price increases are passed on to Cyprus. As he pointed out, “Last year, inflation in Cyprus was very low, below the average. This year, however, due to international prices, it has been disproportionately affected.”
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According to him, this situation is an indication that the country has not moved forward with the energy transition at the required pace. “This shows us—it indicates—that we did not do what we needed to do for the energy transition, and every time there is an international crisis, it affects us disproportionately,” he said.
Referring to social policy, he acknowledged that the state has a clear responsibility to intervene to support citizens, noting, however, that the problem often lies in the way such spending is planned. “The biggest problem we see in general is that most social spending is not targeted. It is thus universal, with the possible exception of the Guaranteed Minimum Income,” he said. As he explained, when support is provided across the board, its effectiveness in achieving its primary goal—reducing social inequality and supporting the most vulnerable households—is diminished.
Regarding the recent measures to combat inflationary pressures, the Chairman of the Fiscal Council stated that their fiscal cost is manageable, while acknowledging that most of them involve some degree of targeting. He distinguished, however, his position regarding interventions in fuel prices, where the reduction in the tax burden applies across the board to all consumers. In his view, such an approach is not the most effective form of social intervention, since the benefit is not directed exclusively or primarily at those facing the greatest financial pressure. “The best way to target assistance is through spending,” he emphasized, citing as an example direct subsidies for specific groups of citizens to cover heating oil or other energy needs.
He applied the same philosophy to tax reform, arguing that the tax system alone is not the most appropriate tool for achieving social goals. As he explained, when tax breaks are provided, those who pay the highest amount of tax are, in fact, the ones who benefit the most. “If, for example, we raise the tax-free threshold, someone in the 35% tax bracket benefits much more, while someone who pays no tax at all benefits not at all,” he said. He clarified that this does not mean tax reform is unnecessary, but that it may primarily serve development goals rather than necessarily social ones.
Mr. Charalambous even used the example of the tax-free allowance to explain the difference. As he said, if the tax-free allowance increases by €1,000, a taxpayer in the 35% tax bracket could benefit by €350, while someone who, due to low income, does not pay taxes would derive no direct benefit. “For social targeting, for the social dimension, the tool must be targeted spending,” he noted, insisting that social policy should be designed in a way that identifies real needs and channels available resources toward them.
Special mention was also made of the risk of fiscal loosening in the run-up to elections. In its interim report, the Fiscal Council cites international empirical literature, according to which there is no evidence that increased pre-election spending necessarily improves a government’s chances of re-election. As Mr. Charalambous noted, “People believe—and very many believe—that a government benefits from pre-election spending. The reality is that this does not correspond to what studies show.” The key, he added, is to avoid spending public funds without clear targeting and with limited social impact.
On the energy front, the Chairman of the Fiscal Council was particularly critical of the delays in previous years. As he noted, it is now well known that solar energy is one of the cheapest forms of energy available, however, it cannot, on its own—at least under current conditions—meet all energy needs, due in part to storage issues. Therefore, complementary sources are required. In this context, he pointed out that the delay in finding solutions that would allow for the use of natural gas as an interim solution carries significant economic costs. “The delay in adopting solutions that allow for the use of natural gas is costing us dearly—both in terms of price and the fines we are constantly paying,” he said.
In closing, Mr. Charalambous sent a message that the current positive state of public finances should not lead to complacency. On the contrary, he argued that the surpluses, the downward trend in public debt, and the generally positive macroeconomic performance create a window of opportunity that should be seized to address problems that have remained unresolved for years. Among these, he cited the demographic challenge and its impact on the pension system, the energy sector, and the need for more effective social policy. “We are not taking advantage of this situation to address long-standing structural problems,” he said, warning that “if we do not start in a timely manner, these problems will gradually translate into fiscal costs.”
