Cypriot Finance Minister Kikis Kazamias is preparing to raise taxes to plug a budget gap that will be wider than estimated this year after a power plant blast knocked out more than half the island’s electricity.

“With the present situation, if nothing changes the fiscal deficit will be 6.5 per cent of gross domestic product in 2011,” Kazamias said in Parliament in Nicosia last week. The previous target had been for a shortfall of 4.5 per cent, he said.

Cyprus, struggling to avoid becoming the latest victim of Europe’s debt crisis, had its long-term foreign and local currency issuer default ratings cut to ‘BBB’ from ’A-’ by Fitch Ratings. The move by Fitch, which cited the nation’s economy and concerns the country will have difficulty raising funds in international debt markets, followed downgrades last month by Moody’s Investors Service and Standard & Poor’s.

President Demetris Christofias, seeking to restore investor confidence, reshuffled his Cabinet last week after the 11 July explosion knocked out the 767-megawatt Vasilikos power plant.

Kazamias said his proposed austerity measures, which will amount to €600 million, or 3.5 per cent of GDP next year, will help keep the deficit at 2.5 per cent in 2012. He asked lawmakers to help design a second fiscal package to be part of the 2012 budget.

Kazamias said he wants to raise tax rates on bank-deposit interest to 15 per cent from 10 per cent and to 17 per cent from 15 per cent on dividends. Raising the interest tax rate will bring in €20 million in 2011 and €30 million in 2012, while a further €15 million will come from the dividend rate hike, he said.

The minister also said he plans to increase the tax rate for incomes over €60,000 a year by five percentage points to 35 per cent. He didn’t estimate that move’s impact on revenue.

The ministry is also drawing up a Bill to raise the value-added tax rate for non-food and non-medicine items to 17 per cent from 15 per cent, which will bring in €20 million in 2011 and €130 million in 2012, he said.

“Its inflationary impact will be excluded from wage indexation in the public sector,” Kazamias said.