Panayiotis Rougalas
The energy crisis and rising living costs have forced governments to scramble to keep up with support measures for businesses and households. With external factors driving prices higher showing no signs of improvement and conditions instead getting worse, Cyprus is calling for countries with sound economic indicators to be given greater fiscal flexibility to provide financial support. Finance Minister Makis Keravnos recently raised the need for what he described as “flexibility” in the fiscal rules imposed on member states at an Ecofin meeting. He also believes certain parameters must be reviewed because these rules were not designed to address situations like the one we face today, with an energy crisis and rising fuel prices driving up costs across the economy.
Under the new European directive on preparing medium-term fiscal plans, Cyprus, like all other member states, must set spending ceilings based on increases in net primary expenditure. Spending increases must also reflect the economic performance of each member state. For the 2024-2028 period, the average growth rate stands at 5.2%, while the 0.6% difference is being managed at the European Union level, according to the Finance Ministry.
Returning to Mr. Keravnos’ appeal to European officials for greater fiscal flexibility to help ease the cost of living, the minister said during the presentation of the 2027 Budget to the House of Representatives that inflation is driving up government spending, while European limits on spending increases are calculated in nominal terms without adjustments for inflationary pressures.
Cyprus must set spending ceilings based on increases in net primary expenditure, while spending increases must also reflect the economic performance of each member state.
“At every European Council meeting, the development of energy transmission networks in the countries through which energy passes dominates the agenda. The cost reaches €17 billion, with the aim of allowing only renewable energy to pass through. What I asked for was flexibility in the EU’s economic governance, particularly for countries with sound economic indicators, so they can receive funding to improve their infrastructure rather than having that money converted into benefit payments,” he told the Finance Committee.
At the Ecofin meeting, he also called for additional funding not only to implement temporary relief measures to ease the cost of living, but also to develop energy infrastructure.
Fuel and VAT
The Finance Ministry has already reduced the tax on heating oil to the lowest level permitted under European rules. However, Cyprus’ finance minister has requested permission to reduce it further. Similar efforts have also been made regarding VAT on Cyprus Electricity Authority bills, as he has identified cases in which VAT is charged on top of VAT. Any changes to VAT rates require European approval.
The total cost of the support measures currently in place has reached €160 million. Measures worth approximately €90 million were already being implemented before an additional €70 million package was announced 15 days ago.
According to the list of measures, electricity subsidies for vulnerable consumers (category 08) and commercial users (category 10) will remain in place throughout 2027. The figures show that 23,300 households will benefit from coverage of 100% of the increase in electricity costs, while approximately 82,500 businesses will receive subsidies of up to 85%.
At the same time, the zero VAT rate on basic goods will remain in place throughout 2027. The measure also covers bread, dairy products, coffee, sugar and baby food until May 31, 2027.
The government has also decided to reduce the excise duty on heating oil from 7.4 cents to 2.1 cents per liter between November 1, 2026, and April 30, 2027. Parliament will try to bring the measure forward because consumers are struggling with rising costs.
Other measures to ease the cost of living include cutting VAT on residential photovoltaic systems from 19% to 9%. In addition, 53,511 vulnerable beneficiaries will receive a one-time payment of €200. Allowances have also been increased for 10,500 households and 24,000 beneficiaries in mountainous areas, providing additional support of €50 per household and €35 per person, depending on altitude.
As the minister also told Parliament, three of the four support measures announced as part of the €70 million package were targeted measures. His comments came in response to criticism that across-the-board measures were putting further pressure on inflation.
High growth rate
The economy is expected to record relatively strong growth of 3.1% in 2026. Growth is forecast to remain high between 2027 and 2029, hovering around 3%.
Inflation is expected to rise in 2026 as fuel prices increase. The inflation rate is forecast to climb significantly to 4.0%, compared with 0.8% in the previous year. It is then expected to ease to 2.5% in 2027 before falling further to 2.0% in 2028 and 2029.
Since 2021, the labor market has continued to improve, with unemployment falling further. This trend is expected to continue over the next few years. Specifically, unemployment is projected to decline to 3.8% of the labor force between 2026 and 2029, compared with 4.4% in 2025, reflecting full employment.
In 2026, the general government fiscal balance is expected to remain in surplus, reaching 2.7% of GDP. The surplus is forecast to improve further to 3.9% of GDP in 2027.
Close monitoring
According to the Finance Ministry’s fiscal risk report, close monitoring of macroeconomic developments is essential, along with an assessment of their potential impact on public finances.
The report states that the domestic and, particularly, the international economic environment remains uncertain. Significant risks stem from the continuing sanctions imposed by the EU and the United States, which have had direct and indirect effects on the European economy, including Cyprus. Hostilities in the Middle East also pose risks.
These factors, combined with rising and volatile energy prices and supply chain disruptions caused by the war, continue to keep core inflation high. As a result, the European Central Bank’s continued policy of raising interest rates is expected to increase borrowing costs for the government, households and businesses. This could reduce disposable income and potentially lead to lower consumption and investment.
