Filenews 13 April 2025 - by Eleftheria Paizanou
The inflated expenditure and the deviation from the EU's economic governance rules (new fiscal rules) may put democracy in adventure in the coming years.
The first bell, according to the Fiscal Council, is likely to be ringed by the European Commission in 2027, if there is no correction in the course of spending growth to avoid risks.
The deviation from the new fiscal rules by Cyprus adds to the uncertainty in the economy created by the trade war declared by US President Donald Trump, imposing unrealistic tariffs one day and freezing them a little later - up to 10% - the next day for a period of 90 days, for the majority of countries.
However, wanting to hit China, Trump has increased tariffs on all Chinese products imported into the U.S., bringing them to 125 percent!
The impact of Trump's tricks on the Cypriot economy may not be immediate, but what concerns experts in Cyprus is whether the Republic will continue to increase spending and will not implement the commitments it has made to the European Commission, then obstacles may arise.
According to the new EU fiscal rules applied since last year, in the context of fiscal discipline, the Republic, based on debt sustainability, should record an increase in net primary expenditure of up to 5.2% in the period 2024-2028, with a cumulative increase in primary net expenditure of 32.3% by 2028.
In fact, the ceilings are aimed at ensuring that the debt is reduced to 60% in 2026 and the primary surplus by 2028 should remain stable at 3.5% every year.
The maintenance of the four-year growth trajectory of net primary expenditure, known as the Expenditure Trajectory, is the main criterion of the assessment of Cyprus. On the other hand, revenues, according to the new fiscal rules, are not included in the criteria for evaluating the Cypriot economy.
The Fiscal Council, in a note forwarded to the Ministry of Finance and the Parliament, sounds the alarm, warning that the country will be faced with a series of risks that may lead the Commission to demand that the Republic proceed with the adoption of measures.
'A major weakness in the agreed Expenditure Strategy and in the NIP is the absence from the calculations of expenditure for which there is a political or other commitment, but which have not yet begun to be implemented, or are only partially implemented.
These expenditures, which have not been taken into account in the estimation of the Expenditure Trajectory, are high enough to reverse the whole trajectory and potentially off-target the country and trigger possible measures on the part of the Commission," the Fiscal Council indicates.
High deviations from the targets
The Council notes that the deviations from the targets are particularly high, large and likely to jeopardise debt reduction if the increase in inflexible expenditure continues, as Cyprus' expenditure trajectory is among the highest in the EU, after Malta and Estonia, while the Commission identifies stagnation in investments beyond those of the Recovery Fund.
It should be noted that the expenditures concern major projects and policies decided by the state, such as the projects of DEFA-ETYFA, KEDIPES, the pollutant market and the implementation of the National Solidarity Fund, which are being promoted for implementation.
They also concern political commitments, such as the ATA for 2025, local developments, bank collateral for farmers and potential liabilities that do not fall under accounting standards, such as deficits of welfare funds, lawsuits for Vassiliko and the electricity interconnection, etc.
The permissible deviation of expenditure can reach up to 0.3% of GDP per year. As the expenditure trajectory moves according to the conservative scenario, it is estimated that the expenditure deviation will be 0.9%, in 2026 the deviation will reach 1.4%, in 2027 it will increase to 1.9% and in 2028 it will reach 3.5% of GDP.
Negative recommendation to the Commission
The above data, according to the Fiscal Council, obliges the ECB to consider the possibility of submitting a negative recommendation to the Commission, both for the progress report and for the preliminary draft budget for 2026.
The warnings do not stop there, as there is great concern about planning until 2027, as well as spending with high implementation risk or political risk. The next elections (parliamentary elections in 2026 and presidential elections in 2028), according to the Council, may make spending cuts in semi-state organisations, unions, organisations and committees politically fearful.
"If the reductions in expenditure recorded in the budget are not implemented, it is normal that the increase in fiscal rules will be higher than the targets at the end of the four-year Fiscal Trajectory (5.4% for 2026 and 4.3% for 2027)," the Fiscal Council stresses.
In addition, he says that out-of-plan expenditures are likely to put pressure on the Republic's liquid reserves, making it difficult to achieve the goal of reducing the public debt to 60%.
As he notes, the Republic should maintain the growth rate of expenditure within the limits to which it has committed. "Under the fiscal rules, the Commission may move towards taking measures to include Cyprus in the new 'Excessive Deficit Procedure' ('Excessive Deviation Procedure'), including the potential creation of an 'Audit Account', if it does not become apparent that Cyprus treats these obligations as a top priority. Such a development will have not only political but also possibly macroeconomic consequences," it said.
The risks, according to the Fiscal Council, could be addressed by taking measures, although the relevant possible announcements by the Commission, which are expected in May, may cause some market turmoil, but developments can still be brought under control.
The recommendations of the Fiscal Council
To address the problems, the Fiscal Council proposes an integrated stockpiling of expenditure, including costs and timetables, monitoring of actual net primary expenditure, avoiding policy decisions without an estimate of costs, implementing a policy of containment of inflexible expenditure, strict adherence to supplementary budgets and medium-term planning.
It proposes the opening of a dialogue with the European Commission, in order to clarify its intentions at the political level, in case the target of the expenditure trajectory fails and to keep the public debt close to 60%.
It also recommends the opening of a dialogue at a technocratic level with Brussels to exclude certain large expenditures from the new fiscal rules, such as those of DEFA-ETYFA and KEDIPES, as well as a change in the accounting treatment of the Rent Versus Instalment plan.
The Council invites the Government to consider the option of extending the expenditure trajectory from 4 to 7 years (i.e. from 2028 to 203)1. "The worst-case scenario will materialise if we avoid the necessary corrections in the course of expenditure today, resulting in a possible 'surprise' on the part of the European Commission in 2027, when the divergence will have widened to levels that would make the correction painful – politically, macroeconomically and socially," he underlines.
Finally, he emphasizes the need for the Republic to transition to the new accounting model, with the aim of aligning it with European accounting standards, since, as he argues, the absence of the system creates ambiguity in the accounting handling of expenditures.
