05 Feb 2017 Will Cypriots spend or save their extra income?

If you earn a gross salary of more than €1,500 per month, you will have noticed an increase in your net income at the end of January. This is because the ‘special contribution’, introduced as part of the bailout programme, expired at the end of 2016.

How big that increase was depends on how much you earned in the first place.

Salaries between €1,501 and €2,500 were levied an additional 2.5%, those between €2,501 and €3,500 had an additional 3%, while those above €3,500 were slapped with an extra 3.5%. Moreover, if you were a senior civil servant, the rates were even higher.

Given that average gross earnings (salary including overtime) amounted to €1,732 in the third quarter of 2016, it means that few people escaped the extra taxes.

Those with gross monthly salaries of just over €3,000 saw a net increase of about €30 in January.

At the same time, public-sector servants are also expected to see their first pay rise in years in 2017, following an agreement with the main unions, PEO and SEK.

Under the agreement, the government’s payroll should not rise higher than the nominal increase in GDP. I am forecasting real GDP growth of 2.9% this year and inflation of 0.9%. If my forecasts are correct, then public-sector works will receive a maximum increase of 3.7%.

In practice, the pay rise could be less, since the agreed increase applies to all government spending on the payroll, not just to individuals. Thus, if more people are hired, there will be less money for everyone else.

Let’s assume for a moment that it is 3.7%. Using the average gross earnings of €1,732, that translates into an extra €64 gross, or probably around €45 after taxes and social insurance are taken off.

While these kinds of increases do not sound like much, there will be a cumulative impact of having just that little bit of extra money each month.

What will Cypriots spend it on?

The economist in me wants them to spend it on paying back bad loans, so that Cyprus can climb out of its bad credit rating and start to attract foreign investment.

As of October 2016, exactly half of the banking sector’s €24.6bn non-performing exposures (NPEs—the stricter EU definition) were among households. Moreover, households have been paying back bad loans at a slower pace than companies. Companies cut NPEs by €2.6bn between October 2015 and October 2016, whereas households cut them by only €523m.

This is all the more puzzling, given the 31.4% increase in car registrations last year and fairly robust retail sales, which grew year on year by 4.6% in January-November.

Realistically, however, I know that some of it will be saved (or repaid to the bank), but a lot of it will be spent. That extra €45 almost pays for the doctor’s appointment you have been putting off, or extra lessons for your children.