Assessing the dual impact of government's support measures

Recent days have witnessed crucial discussions surrounding measures to support households and businesses, a pressing necessity given the prevailing circumstances.

On one hand, the persistent surge in motor fuel prices, with an average Pancyprian cost of 1.71 euros for oil and 1.57 euros for unleaded 95 octane, along with electricity rate adjustments and the global market's response to the Middle East conflict, have all intensified the government's deliberations. Simultaneously, the escalating food prices, marked by a 10% increase in September 2023 compared to the previous year, as per the harmonized consumer price index, further accelerated the government's actions.

In the preceding days, ministers had conveyed their recommendations to the president, while the Ministry of Finance meticulously analyzed the fiscal capacities of the state to implement these measures. Ultimately, the government's decision came as a pleasant surprise to consumers. Not only did they benefit from reduced VAT on sugar and coffee, but also from the Ministry of Finance's endorsement of targeted measures. However, this approach has lately evolved due to the rising concerns over the Middle East crisis's potential implications, which prompted the introduction of broader, horizontal measures into the equation. In total, 11 measures worth 141 million euros (in addition to 6 measures amounting to 55 million euros, integrated into the government's housing policy) have been unveiled. These measures encompass subsidies on fuel and electricity, as well as an extension of zero VAT on essential household products like meat and vegetables.

The government's decision fulfills a long-standing demand of the Consumer Association for a reduction in the fuel consumption tax. As of November 1st, the reduced excise duty on motor fuels will be reinstated, resulting in an 8.33 cents per liter reduction in fuel costs, including VAT. This measure will remain in effect for four months, from November 2023 to February 2024, with an estimated fiscal cost of 21.8 million euros.

Regarding electricity, the government has reintroduced a tiered subsidy system, following the model implemented by the previous government in July 2022. This measure serves both energy conservation and the transition away from fossil fuels, as the subsidy varies inversely with consumption. For domestic electricity use, consumption ranging from 1 to 400 kilowatt-hours per two-month period will receive an 85% subsidy, 401 to 600 kilowatt-hours will receive 75%, and 601 to 800 kilowatt-hours will get 50%. Consumption exceeding 800 kilowatt-hours will not be eligible for subsidies. This system extends to commercial and industrial users as well. The estimated cost of reinstating this measure is approximately 45 million euros, benefiting 429,000 households and 106,000 businesses.

In combination with the installation of photovoltaic systems through the 'PV for All' initiative, this measure aligns with the government's commitment to reducing energy consumption. President Nikos Christodoulides emphasized this during a conference on Climate Change and its impact on tourism, underscoring that these measures will further lower electricity costs and increase the percentage of renewable energy sources (RES) in the energy mix. Notably, the 'PV for All' plan involves an allocation of 30 million euros from the Renewable Energy Sources (RES) and Energy Saving Fund (ex.E), the Republic of Cyprus' principal financial instrument for promoting RES and energy efficiency.

The Consumer Association's positive assessment of the government's response to the crisis is quite remarkable, as they often express reservations. Marios Drousiotis, the Association's president, stated, 'It is more than we expected,' in an interview with "K." He applauded the reinstatement of subsidies on motor and heating fuels and highlighted the significance of the reduced VAT rate on meat and vegetables, urging that the full benefit of these measures be passed on to consumers. Mr. Drousiotis noted that the specifics of interest rate subsidies, photovoltaics, and electricity subsidies are eagerly awaited.

Michalis Antoniou, the General Director of OEB, noted that despite these measures, the economic challenges persist, and the storm may not have fully arrived. He emphasized the need for strong financial stability, especially amidst regional conflicts. He expressed hope that the measures would provide relief to the most vulnerable citizens and mentioned the upcoming meeting between OEB and the Minister of Finance to discuss these matters further.

Economist Pambos Papageorgiou, while acknowledging the merit of these measures, cautioned against treating inflation as a chronic issue. He pointed out that these are temporary measures, aimed at helping those hit hardest by inflation, and not a long-term solution. He also emphasized that inflation has multifaceted causes, emphasizing that these measures should be seen in the context of income erosion and declining purchasing power among middle and low-income households, rather than solely influenced by events in the Middle East.

[This article was translated from its Greek original]