Our View: Economics 101 – tax cuts fuel not reduce inflation

Good to hear someone in a position of authority standing up for economic reason and pointing out what should have been obvious to everyone with the most basic understanding of economics. The task of informing ignorant politicians that tax cuts fuel rather than reduce inflation was undertaken by the spokeswoman of the Central Bank, Maria Papageorgiou, who told the House commerce committee on Tuesday that untargeted measures were likely to push up prices by increasing demand. Papageorgiou said: “If the measures are not targeted, we are channelling money to households that cause more inflationary pressures, through increased consumption.” And to underline her point she said that a European study found that 31 per cent of Cypriot households were unaffected by price pressures. The question raised, that nobody asked, was why was the government ‘protecting’ households that needed no protection from the rising cost of living, thus maintaining high demand? In fact, the line taken at the House committee meeting by the finance ministry permanent secretary, Andreas Zachariades flew in the face of economic logic. He said there were three types of response to the rising cost of living: immediate relief, presumably via tax cuts, reforms that would raise income and measures to cut energy use. Only the third made sense and would not make a bad situation worse, but would never be implemented because the only way to cut energy use is by keeping energy prices high. The first two measures would simply cause more inflationary pressure (increasing income, if possible, would pour fuel on the fire). The government, as Zachariades’ stance indicated, viewed the matter politically in stark contrast to the central bank which saw the dangers posed to the economy by blanket measures that would increase the rate of inflation. With the inflation rate hitting 5.2 per cent last month – among the highest in the euro zone – any more ‘relief’ measures that the president likes to boast about would increase rather than reduce the cost of living. The government needs to show a sense of responsibility in these circumstances and ignore the pressure from political parties such as Akel which is demanding “stricter supervision” of the market and “substantive controls to face unjustified price increases and profiteering”. These are absurd suggestions although they may be appealing to people whose living standards have been affected by the high prices. But tax cuts will not tackle the rising cost of living and the government has an obligation to make this clear to the public. If it feels that low earners must be supported then it should set criteria for those eligible and provide some assistance, but blanket measures that push up demand will ensure the cost of living will keep on rising. This is not what anybody wants.