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Cyprus budget aims to slash deficit

Cyprus's draft budget for next year includes some 840 million euros (£730 million) in spending cuts and tax increases in a bid to slash the island's fiscal deficit to 2.3%, its finance minister has said.

Cyprus has endured consecutive credit rating downgrades in recent months, mainly due to the large banking sector's exposure to debt-laden Greece.

The downgrades have made it difficult for the government to borrow from the markets and stoked fears that the island may be forced to seek a bailout from its European Union partners.

Finance Minister Kikis Kazamias said the draft budget includes more spending cuts and tax hikes to bolster an initial 180 million euros (£156 million) austerity package which politicians passed in August, but which was deemed insufficient to tackle the burgeoning deficit.

The public sector takes up almost a third of all government spending. The new measures include scrapping 1,100 public sector positions and cutting new government workers' salaries by a tenth, Mr Kazamias said.

Other measures include rolling back social handouts by 200 million euros (£174 million) and raising the sales tax from 15% to 17% for at least three years - a move harshly criticised by opposition parties.

Mr Kazamias said the deficit for 2011 is projected to hover between 6% and 6.5% of gross domestic product. More fiscal belt-tightening is expected to shrink the deficit to around 1% in 2013 and 2014, he said.

Debt for 2012 is forecast to remain static at 65% of gross domestic product, dropping slightly to 64.2% in 2013 and to 62.8% in 2014. The finance minister also said growth for 2011 will be between zero and 0.5% at best, rebounding in 2012 to between 1% and 1.5%.

Mr Kazamias will submit the Cabinet-approved draft budget to parliament next month, saying the risks of politicians voting it down were too serious to contemplate.

"In my calculations, there is no scenario of the budget being voted down," he said.

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