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Cyprus is bouncing back from recent economic challenges, with its financial health improving dramatically. Current fiscal surpluses now exceed what they were before the pandemic, thanks to a significant increase in revenue. According to a new report from Morningstar DBRS, this boost comes mainly from higher social security payments and increased taxes on businesses.
Unlike many other countries in the eurozone, Cyprus has managed to grow its government revenue faster than its overall economy in recent years. In fact, the share of public revenue in Cyprus jumped from 39.4% of the country's GDP in 2019 to an impressive 43.3% in 2023, while the eurozone's revenue share has remained pretty steady.
The report, titled "Cyprus: Public Finances Benefit From Strong Revenue Growth," highlights that this turnaround in the country’s finances is mainly due to rising contributions to social security and higher taxes on corporate profits. After facing deficits during the pandemic years of 2020 and 2021, Cyprus flipped the script, posting a budget surplus of 2.7% of its GDP in 2022 and expecting it to hit 3.1% in 2023.
Much of this improvement comes from the lifting of financial support measures put in place during the pandemic. As the economy bounced back and more people got jobs, tax revenues and social security contributions soared. In fact, overall government revenue grew by an average of 13.2% in 2022 and 2023, outpacing a 6.8% rise in government spending.
Looking ahead, the International Monetary Fund (IMF) predicts that Cyprus will maintain its stronger revenue levels, leading to continued positive financial performance. The government is expected to enjoy budget surpluses of about 3.1% of GDP in 2024 and 3.2% in 2025.
A key driver of this financial success has been the rise in social security contributions. More jobs and a higher contribution rate mean that more people are paying into the system. The number of people contributing to Cyprus’ Social Insurance Fund increased by 11.9% from 2019 to 2023, helping to strengthen the fund’s financial position. Contributions are also set to rise by 1.3% every five years until 2039, with the next increase coming in January 2024.
Additionally, the boost in corporate tax revenue has been significant. Taxes on corporate profits made up 6.6% of GDP in 2022, up from 5.6% in 2019. This increase is partly due to foreign companies moving their operations to Cyprus, especially in the tech and communications sectors. The government has rolled out various programs, including tax incentives, to attract these businesses.
In short, Cyprus is on a solid path to financial recovery, with rising revenues helping to create budget surpluses that are better than before the pandemic. This positive trend seems set to continue as the country benefits from both structural improvements and a strong economy.
[With information from CNA]
