Cyprus’ 2014: Pay Cuts and Tax Hikes

Still reeling from a bleak 2013 that brought harsh austerity measures in return for a 10 billion euro ($13 billion) international bailout to keep the economy and banks from collapsing, Cyprus is facing more of the same as Jan. 1, 2014 dawned.

The government is preparing a tough program of pay cuts and tax hikes and still hasn’t said when it will lift capital controls that limit depositors to withdrawing only 300 euros per day from their accounts to prevent a run on the bank.

Despite that, money is slowly bleeding out of the banks as Cypriots who were burned by President Nicos Anastasiades’ promise not to confiscate nearly half their accounts – and then to promptly renege on it as soon as he took office – are taking their money out as fast as they can.

That’s part of a 13 billion euro ($17 billion) plan the government had to come up with in return for getting the bailout and the measures for 2014 show how tough a year it will be, with the likelihood of more stores closing too, as the Famagusta Gazette noted in the litany of misery that’s coming:

Under the Revised Memorandum of Understanding of December 2013, Cyprus must fully implement 10 permanent measures for 2014, amounting to at least €270 million.

– A reduction in total outlays for social transfers by at least €28.5 million to be achieved through streamlining and better targeting of child benefits and educational grants, and abolition of social cohesion benefits provided by the welfare services,

– A further reduction in emoluments of public and broader public sector employees and pensioners by a flat rate reduction of 3% on all wages,

– An introduction of a fee on monthly transportation cards for the use of public transportation services by students and pensioners,

– An introduction as of the budget year 2014 of structural reform measures in the educational system, notably, a reduction of the number of teachers seconded to the Ministry of Education and Culture, the removal of 1:1.5 teaching time ratio from evening schools of general and technical and vocational education, the elimination of teaching time concession to teachers for being placed in two or more educational districts, the elimination of mentoring components for pre-service and in-service training for newly appointed teachers and the reduction of the cost of afternoon and evening programs.

As for the revenue measures those include:

– An extension of the application of the temporary contribution on gross earnings and pensions of public and private sector employees up to 31 December 2016 as follows: €0 – €1,500 0%; €1,501 – €2,500 2.5%; €2,501 – €3,500 3.0%; and over €3,501 3.5%,

– An increase of the standard VAT rate from 18% in 2013 to 19% in 2014

– An increase of the reduced VAT rate from 8% to 9%

– An increase of the tax rate on fuel of €0.05

– An increase of social security contributions, as of 1.1.2014

Employees will contribute an extra 1%, employers another 1%, while self-employed persons will contribute 2% and public servants 0.5%