The voting of the state budget, the increase of VAT from 15% to 17% and aimed social benefits are the measures included in the first priority of the Government, Minister of Finance Kikis Kazamias said on Friday. Kazamias, who attended the meeting of the House of Representatives Committee on Finance, which began discussing fiscal consolidation measures, said the VAT increase would come into effect on January 16, 2012, giving companies time to prepare their cash systems. He added that after the voting of the bill to freeze salaries in the public sector, the state would save 230 million euros annually. The bills on fiscal consolidation, approved by the Cabinet were tabled Thursday.

The bills include, inter alia, a freeze of salaries in the public sector for two years, an increase of the tax rate on profits from 17% to 20%, a rise in the standard VAT rate from 15% to 17% and a social dialogue for a more just redistribution of Cost of Living Allowance (COLA).

These measures were decided during a meeting between the President of the Republic and the political parties last week, after which the Government Spokesman announced that a broad consensus was reached. On August 27 the Parliament approved the first fiscal consolidation package with a fiscal impact of 1% GDP or 180 million EUR, while a bill on the increase of VAT rate to 17% from 15%, which would yield an additional 140 million euro to the state coffers, is pending approval. The Cabinet also approved a second fiscal consolidation package, incorporated in the 2012 state budget, which would reduce the budget deficit below the 3 per cent Euro area benchmark (2.8%) in 2012. The package provides for the abolition of 939 vacant positions in the public sector, a 10% reduction of the starting salary of civil servants, the introduction of income criteria for the better targeting of welfare spending such as child allowance and student allowance (100 million EUR). On November 18 the Finance Minister introduced a third fiscal consolidation package aiming at restoring Cyprus` credibility in the international markets. The package provides for a freeze of salary increases in the public sector (including COLA) for two years, with a yield of 355 million EUR, a scaled contribution of high earners in the private sector and the introduction of a 0.5% levy on the turnover of companies with local activities for two years. According to the EU` new economic governance provisions, Cyprus must take concrete steps for the correction of its public finances. Otherwise a fine of 0.2% GDP will be imposed.