INFLATION ''GNAWED'' THE BUDGET, BUT ''INFLATED'' THE COFFERS - Filenews 27/10 by Theano Thiopoulou
An emergency bell and a strong shield of protection make up the current picture of Cyprus' public finances, according to the new announcement issued on October 26, 2026 by the Statistical Service (CYSTAT).
The quarterly fiscal accounts of the General Government for the second quarter of 2026 recorded a deficit of €142.7 million, compared with a deficit of €127.9 million. for the period April-June 2025. The economic balance of the General Government stood at -0.4% of GDP (compared to -0.3% last year), sending a signal that despite the inflow of significant revenues, structural burdens and increased current liabilities are putting temporary pressure on the macroeconomic performance of the state.
This development vividly reflects the pressure on the state coffers from the emergency measures against high prices and the rise in prices. However, the bigger picture, with the latest data published by Eurostat, shows that Cyprus is "championing" Europe, having built a powerful fortress against the pressures of Brussels. Despite the comfort of the country, the Cypriot leadership politically supports the need for targeted flexibility in Europe for the sake of the most stressed states, but now speaking from a position of absolute economic power and security.
Although the word "deficit" sounds alarming, experts explain that it is a completely controlled and normal development.
The pressure from fuel prices and the financing of social packages (electricity subsidies, zero VAT rates) absorb liquidity in real time, affecting the short-term balance.
Moving on to the analysis of the data of the Statistical Service, it seems that the fiscal pressure is located exclusively in the hard core of the state.
The central government sector recorded a deep deficit of -€462.6 million, showing a deterioration compared to the deficit of -€441.3 million in the second quarter of 2025.
Local Government moved into positive territory, recording a surplus of €3.9 million. (compared to a deficit of €0.2 million last year). Social Security Organizations remained the strongest bulwark of the economy, producing an increased surplus of €316.0 million.
Total General Government expenditures exceeded the rate of revenue growth, recording an increase of €84.0 million. (+2.3%) and reaching €3,743.7 million. This expansion was driven entirely by current consumption and inelastic spending. Social benefits climbed to €1,540.9 million, recording a net annual increase of €77.2 million. (+5,3%).
The state payroll (including imputed social contributions and pensions of civil servants) increased by +4.0% (+€39.0 million), breaking the barrier of one billion euros (€1,004.9 million).
The data show that, in order to balance the increase in operating expenses, the state proceeded with a significant reduction in capital expenditure, which fell by -24.2% to €310.9 million. While gross fixed capital formation remained almost stable (-0.8% to €261.3 million), other capital transfers shrank dramatically by 66.2%. A positive development was the further decrease of government subsidies by 28.1% (to €23.3 million).
VAT saves the lot in state revenues
Total government revenues for the second quarter of 2026 amounted to €3,601.0 million, showing a moderate increase of €69.1 million. (+2,0%) compared to the corresponding period of 2025. The main drivers of support for state funds were:
➧ Net VAT revenues recorded an impressive increase of +19.0% (increase of €140.5 million), reaching €879.4 million. compared to €738.9 mil. in 2025. This data reflects the continued dynamics of consumption in the domestic market. Despite the zeroing of VAT on some basic products, the general high prices (high prices for other products and fuel) increase the value of transactions, with the result that the state ultimately collects more money from the consumption tax, partially offsetting the cost of the measures.
➧ Taxes on production and imports totalled €1,242.3 million, recording an annual increase of 8.3%. Social contributions increased by +6.9% (an increase of €81.1 million) reaching €1,258.5 million. In contrast, direct taxes on income and wealth fell by -1.3% to €600.9 million.
