Despite high fiscal surpluses and the improved picture of public finances presented by Cyprus, the government is being called to curb the rate of growth in expenditure. The country is not at risk of fiscal derailment, but it also cannot spend beyond the limits set under the EU’s new economic governance framework. In absolute terms, according to data published by the European Commission, the deviation – that is, money that should not have been spent – has reached €540 million over the three year period 2024–2026.
The five country specific recommendations on Cyprus’s economic, social, structural and fiscal policy, as well as employment policy, published on Wednesday by the European Commission as part of the European Semester process for coordinating member states’ economic policies, call on the government, among other things, to maintain strict control of public spending and avoid deviations from the agreed fiscal framework.
More specifically, given the significant deviation recorded in 2025 and projected for 2026 in relation to the recommended ceiling for net expenditure, the Commission calls for measures in 2026 and 2027 to ensure that net spending does not exceed the maximum growth rates.
The Council recommended the following maximum growth rates for net expenditure: 6% in 2025, 5% in 2026, 5.4% in 2027 and 4.3% in 2028, corresponding to cumulative growth rates calculated with 2023 as the base year of 8.9% in 2025, 14.3% in 2026, 20.5% in 2027 and 25.7% in 2028.
According to the Commission’s calculations, Cyprus’s net expenditure increased by 9.6% in 2025 and by 11.8% cumulatively in 2024 and 2025. The increase in 2025 exceeds the recommended maximum growth rate and corresponds to a deviation of 1.3% of GDP (approximately €390 million) on an annual basis. If 2024 and 2025 are examined together, the cumulative growth rate of net expenditure also exceeds the recommended maximum and corresponds to a deviation of 1% of GDP (€300 million) cumulatively.
Net expenditure in Cyprus is projected to increase by 7.4% in 2026 and by 20.1% cumulatively across 2024, 2025 and 2026. The projected increase in 2026 exceeds the recommended maximum growth rate and corresponds to a deviation of 0.9% of GDP on an annual basis. If 2024, 2025 and 2026 are considered together, the projected cumulative growth rate of net expenditure also exceeds the recommended maximum and corresponds to a deviation of 1.8% of GDP (€540 million) cumulatively.
“However, this development must be contrasted with the fact that, at the same time, Cyprus is achieving high public surpluses and a rapid reduction in the ratio of public debt to GDP,” the Commission’s staff working document accompanying the recommendations states.
In any case, for the average increase in expenditure to remain within limits up to 2028, significant cuts will need to be made from this year and in the coming years.
Defence and energy
Within the same framework, the EU calls on Cyprus to:
- Strengthen spending and preparedness in the defence sector while ensuring efficiency and gradually adjusting the budget to cope with structurally higher defence spending.
- Ensure that any measures taken to mitigate the impact of rising energy prices are temporary, targeted at protecting vulnerable households or addressing the needs of energy intensive businesses, maintain incentives for energy saving and ensure that their fiscal cost remains compatible with commitments under the EU fiscal framework.
