Cyprus economy sustains strong public finances in 2025, outperforming many eurozone counterparts, as detailed in a recent analysis by Eurobank economist Michail Vassileiadis.
- Cyprus economy sustains strong public finances in 2025, outperforming many eurozone counterparts, as detailed in a recent analysis by Eurobank economist Michail Vassileiadis.
- As long as the geopolitical situation remains stable, Vassileiadis believes that robust business activity could continue to support the island's public finances.
The preliminary fiscal data and first estimates of gross domestic product (GDP) indicate that Cyprus has achieved a remarkable fiscal balance for four consecutive years. In 2025, the nation recorded an overall surplus of 2.6 per cent of GDP and a primary surplus of 3.7 per cent, excluding interest payments.
Despite a decline from the previous year’s figures of 4.1 per cent and 5.4 per cent respectively, Cyprus continues to hold a leading position within the eurozone. According to the European Commission’s Economic Forecast for November 2025, the island remains the top performer in overall fiscal balance.
Vassileiadis notes that the notable fiscal outcomes have been achieved even amidst policy adjustments that eased both revenue and expenditure. A reduction in VAT on electricity, introduced in April, led to a 1.7 per cent decline in VAT receipts in 2025, contrasting with a 6.4 per cent rise in 2024.
Additionally, public sector wages and pensions saw increases beyond the typical partial indexation for the first time since 2009. This resulted in a 6.5 per cent rise in public sector wage expenditure and a 7.6 per cent increase in pension spending.
Interestingly, total government revenues still expanded by 5.9 per cent in 2025, albeit lower than the 7.4 per cent growth observed in 2024. The revenue boost was largely driven by a 7.9 per cent increase in social security contributions and a 9.5 per cent rise in corporate income tax receipts.
On the expenditure side, total government spending surged by 10.3 per cent in 2025, a significant increase compared to just 1.0 per cent in 2024. This rise was primarily attributed to higher compensation for employees and increased social transfers, particularly in the first quarter of the year.
The analysis highlights that the structural strengths of the Cypriot economy have supported these impressive fiscal performances. Vassileiadis points out that tax incentives introduced in 2022 aimed at attracting foreign nationals for work or business ventures, along with strong construction activity, have contributed to the positive outcomes.
Labour market data reflects these trends, with employment rising by 2.7 per cent to reach an all-time high in 2025. The growth in jobs was predominantly seen in professional, scientific, and technical services, as well as in construction. Additional contributions came from administrative services and the financial and insurance sectors, benefitting from ongoing transformations through mergers and acquisitions.
Looking ahead, Vassileiadis emphasises that sustaining fiscal surpluses above 3.0 per cent of GDP, as projected in the government’s medium-term fiscal framework, will rely on the resilience of these structural drivers. Between 2026 and 2028, corporate tax revenues and social security contributions are anticipated to remain the primary sources of revenue growth.
However, personal income tax revenues are expected to experience a modest decline through 2028 due to recent tax reforms. The effective reduction in the tax burden, especially for low and middle-income earners, is likely to boost labour market participation, which reached 65.2 per cent in 2025, closely mirroring the 65.5 per cent recorded in 2023.
Vassileiadis also highlights the increasing role of foreign workers in Cyprus’ labour market, noting that they accounted for over 90 per cent of employment growth from 2023 to 2025. This trend could further enhance social security revenues in the upcoming years.
The planned increase in the statutory corporate income tax rate from 12.5 per cent to 15 per cent starting in 2026 raises questions about its net revenue impact, which will depend largely on the elasticity of operating surplus concerning the tax rate. Despite this adjustment, Cyprus is expected to remain among the four lowest corporate tax jurisdictions in the European Union, alongside Hungary, Bulgaria, and Ireland, preserving its competitive standing.
As long as the geopolitical situation remains stable, Vassileiadis believes that robust business activity could continue to support the island’s public finances.
