PUBLIC DEBT ALMOST HALVED - BENEFIT FOR SOCIETY OR JUST A NUMERICAL ILLUSION? - Filenews 26/4 by Andreas Charitou
When Cyprus first held the presidency of the Council of the European Union (EU) in 2012, the Cypriot economy was in a dire economic situation, with public debt as a percentage of Gross Domestic Product (GDP) standing at around 110%, while by 2025 it had been reduced by almost half, to 55%, which clearly reflects a stronger fiscal position, especially at a time of severe geopolitical crisis in the Middle East.
This significant improvement is not just an accounting event but reflects a deep shift from conditions of macroeconomic uncertainty to economic stability. This fiscal improvement has obvious strategic value, because it strengthens the resilience of the Cypriot economy and expands the state's room for reaction to external shocks, as is currently the case with the geopolitical crisis in the Middle East. The crucial question, however, is not whether the debt has simply been reduced, but whether this reduction has improved the well-being of citizens, households and businesses?
It protects the economy and society
Public debt in a dangerous geopolitical crisis: Why low public debt protects the economy and society;
The value of low public debt is very important when the international environment is uncertain, especially today with the war situation in the Middle East and the threat of disruption of navigation through the Strait of Hormuz, with very serious consequences not only for energy but also for the wider operating costs of the economy: much more expensive fuel, disruptions in shipping and the supply chain, pressure on tourism, aviation and tourism-related sectors, which result in a higher cost of living, an increase in inflation, a slowdown in economic growth and a weakening of the competitiveness of Cypriot businesses and consequently an increase in risks for vulnerable social groups.
Due to these consequences for households and businesses, the state is rightly called upon to intervene with support measures. Lower public debt gives the state more freedom to absorb part of the economic pressures, without jeopardizing the macroeconomic stability of the state.
Therefore, the state can more easily support vulnerable groups and critical sectors of the economy, such as tourism, farmers, and energy. The support measures amounting to over €200 million recently announced by the President of the Republic, are moving in the right direction.
Also, low public debt gives the state the opportunity to borrow from the markets at a much lower cost to support critical sectors of the economy, without undermining the future. Unfortunately, in 2013, due to the very high public debt, the state was unable to borrow from the markets and was forced to sign a memorandum of understanding with the Troika, with heavy economic consequences, both for households, businesses, future generations and the economy in general, with a prolonged recession for three and a half years, from 2011 to 2014.
How the public debt is substantially reduced;
The reduction of public debt/GDP can be done with a prudent policy, which brings growth to the country, with targeted public spending and by drawing borrowing from the markets at a lower cost, without the state sacrificing significant and critical investments.
But there is also a less balanced option, where states mechanistically seek to reduce public debt through excessive austerity, tax increases, public spending cuts and a reduction in public investment (e.g. digitalization, health, schools), resulting in a slowdown in growth.
When the focus is solely on reducing the public debt/GDP ratio with insufficient support for e.g. small and medium-sized enterprises or vulnerable groups, fiscal adjustment can turn into social pressure, intensify inequalities and lead to a significant contraction in public investment.
Also, ultra-conservative fiscal policies with large primary surpluses, due to increased taxation or reduced public spending or investment, improve the debt ratio but not necessarily prosperity.
In conclusion, the prudent policy of reducing public debt is the result of an overall macroeconomic policy that combines economic growth, fiscal discipline and credibility towards institutions and markets, without postponing productive investments, without undermining the future and without exhausting society.
Social well-being
Public debt and social welfare: real prosperity or simply an improvement in indicators;
Which of the above applies to Cyprus? Was the reduction of public debt the result of prudent policy or did it occur more mechanistically? Economic indicators that reflect the quality of public debt reduction are, among others, the growth rate of the economy, the improvement of productivity, the improvement of public investment, the reduction of unemployment, the improvement of fiscal surpluses, the course of social spending, and the tax burden on citizens.
The macroeconomic indicators of the Cypriot economy show that the reduction of public debt from about 110% in 2013 to 77% in 2023 and to 55% in 2025 is mainly associated with an improvement in fundamental economic figures and seems to have been based more on prudent policies than on mechanistic compression of the economy through targeted macroeconomic policies of the state.
This picture is reinforced by the transition from a deep recession in 2013 to positive growth rates of 3.8% in 2025, a decrease in unemployment from 16% in 2013 to 4.3% in 2025, as well as the maintenance of strong fiscal surpluses of 3.5% in 2025 compared to the 2013 deficit, which are considered to be among the best in the EU.
There was also an improvement in public investment to around 3.3% of GDP in 2025 and a gradual strengthening of the economy's investment base, while labour productivity improved from -1.2% (2013) to 1.5% in the last three years (EU: 0.2%), while the de-escalation of public debt does not seem to have been accompanied by overtaxation or a reduction in social benefits.
In conclusion, it seems that the significant reduction of public debt acquires real social value to the extent that it has been accompanied by growth, employment, greater fiscal capacity and strengthening of investments and improved well-being of citizens. This does not negate the fact that challenges remain, but it shows that the Cypriot economy has entered the new period with stronger resilience and more possibilities to support society.
In other words, debt reduction does not seem to be a narrowly numerical success, but the result of an economic policy that is already strengthening the economy and expanding the possibilities of supporting the economy.
Social well-being
The real success of public debt is judged on social well-being and economic resilience.
In a period of geopolitical uncertainty, reducing public debt is not enough to improve indicators, but must strengthen the state's ability to protect social welfare and the economy. The essential value of fiscal progress can be seen when it translates into greater security, stability and the ability to intervene in a timely manner in favor of society and the economy.
Cyprus' economic results show that this reduction in public debt is not just accounting, but reflects a stronger and more flexible fiscal base. The state's prudent policy still has room to support socially vulnerable groups, small and medium-sized enterprises and other sectors affected by more expensive energy, supply chain disruptions and tourism uncertainty from the ongoing conflagration in the Middle East, which reinforces the importance of the policy to date and shows that lower debt gives the state more tools for targeted and effective support to society.
This is precisely what allows the state's economic policy to be more flexible today and more fundamentally oriented to the needs of society.
* Ph.D., CMA (USA), FCPA (Aust)
Professor of Finance, University of Cyprus
