Panayiotis Rougalas
The 2027 state budget will be presented to the Council of Ministers on Wednesday. It was prepared against a particularly challenging economic backdrop, just one week after the European Central Bank raised interest rates in an effort to contain inflationary pressures.
The ECB has said the conflict in the Middle East continues to push up inflation, which is expected to remain well above target for an extended period. It also warned that the outlook remains highly uncertain, with risks tilted upwards for inflation and downwards for economic growth.
Asked about the main features of the 2027 budget, Finance Minister Makis Keravnos told Kathimerini that it projects a surplus and safeguards the country’s fiscal stability, while also placing emphasis on economic growth and the implementation of major projects.
He added that strengthening Cyprus’ defense capabilities is now a necessary priority and that the budget therefore provides for a significant increase in defense spending.
Keravnos said the government’s goal is to build a strong and resilient economy while continuing its broad social policy.
The total medium-term spending ceiling for the central government has been set at €11.03 billion for 2027.
Overall, the government’s strategy for 2026 and its Medium-Term Fiscal Framework for 2027-2029 are aimed at maintaining fiscal stability, strengthening the economy’s resilience, and creating the conditions for sustainable and balanced growth, according to the Finance Ministry.
In light of geopolitical developments, the main short-term priority of economic policy is clearly to limit the financial fallout without putting the sustainability of public finances at risk.
The Fiscal Policy Strategic Framework for 2027-2029, which provides an early indication of the figures included in the annual state budget, projects that direct tax revenue will rise to €4.36 billion in 2027, from €4.16 billion in 2026.
Indirect tax revenue is also expected to increase, reaching €4.82 billion in 2027, compared with €4.55 billion in 2026.
Non-tax revenue is forecast to fall to €1.52 billion in 2027, from €2.01 billion in 2026. Overall central government revenue is expected to reach €10.71 billion, compared with €10.73 billion in 2026.
At the same time, the total medium-term spending ceiling for the central government has been set at €11.03 billion for 2027.
General government revenue is expected to reach €16.4 billion in 2026, up from €15.92 billion in 2025. This represents an increase of 3.4%, mainly because of anticipated rises in taxes on production and imports.
During 2027 and 2028, public revenue is expected to grow at a slower average rate of 3.3%, partly because programs funded through the Recovery and Resilience Plan will come to an end.
Primary expenditure is forecast to increase by 5.5% in 2026 compared with 2025, mainly because of higher spending on social benefits.
During the 2027-2029 period, overall public spending and primary expenditure are expected to rise by an average of 2.9% and 3.1%, respectively.
€900 million surplus
The Medium-Term Fiscal Framework states that, under the Finance Ministry’s macroeconomic scenario, the fiscal balance is expected to remain in surplus in 2026, reaching €900 million, or 2.3% of gross domestic product.
That compares with a surplus of €1.24 billion, or 3.4% of GDP, in the previous year.
The primary balance is also expected to remain in surplus, reaching €1.4 billion, or 3.7% of GDP, in 2026. This compares with a primary surplus of €1.65 billion, or 4.6% of GDP, in 2025.
For 2027, the fiscal surplus is projected to reach €1.11 billion, equivalent to 2.8% of GDP. That would be 0.5 percentage points of GDP higher than the forecast for the current year.
Over the medium term, the fiscal balance is expected to remain in surplus, averaging 3.3% of GDP during 2028 and 2029.
War expected to slow growth
Cyprus’ economy is expected to slow in 2026 because of the war in the Middle East, with growth estimated at 2.7%, down from 3.8% in 2025.
The sharp rise in oil prices and wider geopolitical uncertainty are expected to have a direct negative effect on the Cypriot economy, particularly in the short term.
Domestic demand, including investment and private consumption, is expected to remain the main driver of growth. However, the forecast is surrounded by considerable uncertainty because of the highly volatile international geopolitical and trade environment.
Inflation, as measured by the Harmonized Index of Consumer Prices, is expected to rise sharply to 4.5% in 2026, from 0.8% in 2025, mainly because of the significant increase in global oil prices.
Unemployment is expected to edge up to around 4.5% of the workforce in 2026, from 4.4% the previous year.
Budget prepared under new EU framework
Because of the severe impact of the coronavirus pandemic on public finances across the European Union, the Stability and Growth Pact’s General Escape Clause remained in force until 2023. It ceased to apply in 2024.
A new EU economic governance framework was also agreed in April 2024, placing greater emphasis on the growth rate of net primary expenditure.
The Republic of Cyprus submitted its Medium-Term Fiscal-Structural Plan for 2025-2028 on Oct. 15, 2024.
The plan sets the annual growth rate of net primary expenditure for that period and outlines 52 investments and reforms. It received a positive assessment from the European Commission and was adopted by the EU’s Economic and Financial Affairs Council, or Ecofin, on Jan. 21, 2025.
The annual growth rates for net primary expenditure approved by Ecofin are 6% for 2025, 5% for 2026, 5.4% for 2027 and 4.3% for 2028.
Under the regulations governing the EU’s new economic governance framework, Cyprus must submit an annual progress report by April 30 each year.
The report must provide information on progress in following the net expenditure path approved by Ecofin, as well as the implementation of the broader reforms and investments included in the national medium-term fiscal-structural plan and carried out through the European Semester.
