Filenews 30 September 2025 - by Theano Thiopoulou
The 2026 state budget and the 2026-2028 Medium-Term Financial Framework have six objectives: maintaining a budget surplus, containing public sector employment, reducing public debt in the medium term, promoting the green transition and digital transformation, creating conditions for sustainable growth in key sectors of the economy and maintaining a robust financial system.
The Minister of Finance, Makis Keravnos, after the approval, yesterday, of the 2026 budget by the Council of Ministers stated that the budget has a ceiling of €10.7 billion, excluding the expenses for amortization. Development spending is expected to increase by 4.7% in 2026, compared to the year 2025. It is important to note that the 2026 budget shows an increase of 6.7% in social benefits, including expenditure on education, health and social welfare benefits.
Beware of risks
As far as fiscal risks are concerned, those arising from the deterioration of geopolitical developments are highlighted, which may have a negative impact on the economic activity of the country, without ignoring the risks due to the consequences of climate change, such as natural disasters, the need for compensation in the primary sector and investments in infrastructure and prevention and preparedness projects.
At the same time, the potential effects that may arise in relation to the natural gas terminal in Vasilikos should be managed. At the same time, the implementation of infrastructure projects with significant added value, with particular emphasis on co-financed projects and the successful completion of the Recovery and Resilience Plan projects, is considered of paramount importance.
That is why it is necessary and appropriate, according to the Minister of Finance, to continue the implementation of the already prudent and precautionary economic policy, with the continuation of primary surpluses, always within the framework of fiscal discipline. According to the baseline macroeconomic scenario, the prospects of the Cypriot economy in the medium term remain positive but with a significant degree of uncertainty, due to adverse geopolitical developments. Therefore, the growth rate is expected to be around 3.1% in 2026, and the unemployment rate is expected to be around 4.6% of the labour force.
Good indicators
A strong point of the state budget is that, in the medium term, the fiscal position of Cyprus is projected to remain in surplus, with the fiscal balance averaging around 3.4% of GDP in the period 2026-2028.
The course of public debt as a percentage of GDP is very important, which is estimated to remain on a downward trend and to be limited to 43.6% at the end of 2028. Another important element from the presentation of the budget is that repayments of foreign loans (mainly long-term loans received by the Republic of Cyprus from foreign sources) are quite high. According to the budgeted expenditures of 2026, they amount to €2.14 billion, and reach €2.42 billion in 2027 and €2.70 billion in 2028.
On the big issue of the state payroll, the Minister of Finance points out that in 2026 the effort to contain the state payroll will continue, with the state payroll rate set in 2026 at 27.5% of the budget as opposed to 28% in 2025. That is, he explains, the cost of the payroll remains at the same levels, unlike in earlier times. Budget figures show that staff costs for 2026 are estimated at €3.77 billion. (€3.15 billion in total salaries and €624.16 million in pensions and tips) and the state payroll reaches €4 billion in 2028 (€3.35 billion in total earnings and €676.16 million in pensions and tips).
Tax revenues
The 2026 budget shows that direct taxes are estimated at €4 billion from €3.92 billion. In 2025, €4.23 billion will increase in 2027, and €4.27 billion in 2028. Indirect taxes, which include value added tax (VAT) and excise duties on alcohol, tobacco and energy, are estimated to bring in revenues of €4.55 billion in 2026, from €4.56 billion in 2025, slightly below, and in 2027 they will increase to €4.76 billion to reach €4.95 billion in 2028.
Operating costs
Operating expenses include, but are not limited to, maintenance and repairs, trainings/conferences, consultancy/research, water purchase, defense and policing costs, and unforeseen expenses/reserve.
For 2026, they are projected to increase by 11.8% and amount to €1,574.0 million. compared to €1,408.3 mil. in 2025. The increase is mainly due to increases in the water market budget by €26.1 million, provisions for defense and policing expenditure by approximately €31.1 million, provisions for expenses for the organization of the Cyprus Presidency of the Council of the EU by €6 million. and increases in expenditure on staff training/conferences, seminars and other events by €16.1 million.
Transfer payments
The transfer payments of the 2026 budget include:
- social benefits (€2.3 billion), showing an increase of 6.7%
- public contributions to the Social Insurance Funds and GHS (€1.6 billion)
- the contribution of the Republic of Cyprus to the EU budget (€294.1 million).
- grants to state organizations of public and private law (including state universities amounting to €231.6 million for 2026) and
- grants to Local Government Authorities (€147 million).
In 2026, the above category is projected to increase by 5.2%, i.e., from €4,014.1 million. in 2025 to €4,224 million. in 2026. The main increases concern an increase in the general government contribution to the GHS by €101.2 million, the general government contribution to the Social Security Fund by €62.1 million, the inclusion of a provision of €2 6 million. Regarding the personal assistance and home care allowance and grants to state organizations by €37.7 million.
Fewer positions in the public service
In the presentation of the 2026 state budget, it is stated that while in previous years (years 2022-2024) there was an increase in permanent positions, in 2026 a reduction of 14 positions is achieved for the second consecutive year compared to the approved budget of 2025. Specifically, for 2026, the creation of 458 positions (including 60 permanent positions of hourly paid government staff in the Fire Service and the abolition of 472 positions, including 22 permanent positions of hourly paid government staff at the Ministry of Interior. It is reported that in the context of the budget for 2026, the effort to contain employment in the public sector continues.
Employment in the public service decreased by 1,963 people (19,529 serving on 1.1.2012 and 17,566 serving on 30.6.2025). The 17,566 serving in the public service also includes about 3,920 employees who are seconded to OKYPY. Consequently, if this number is subtracted, the reduction in employment in the public service amounts to 5,883 people. The presentation explains that despite the decrease in employment in the public service, employment in the education sector increased in the same period by 3,752 people (12,789 serving on 1.1.2012 and 16,541 serving on 30.6.2025).
