Austerity and the income distribution : the case of Cyprus

The economic crisis affecting Cyprus is likely to have considerable impact on the income distribution. Our analysis provides an early assessment of the short-run distributional effects of austerity measures. We distinguish between fiscal measures that affect wages, taxes and contribution rates and measures that directly affect the function of the welfare system. Using the tax-benefit EUROMOD model we attempt to quantify the distributional implications of both. The analysis focuses on the policy changes introduced over the period between 2011 and 2012, i.e. before the expected bailout deal between the government of Cyprus and the consortium of international lenders which is expected in spring 2013. Specifically, we simulate the ceteris paribus impact of the reforms on inequality and poverty as well as estimate how the burden of austerity has been shared across income groups.