The final touches are being added to Cyprus’ 2026 state budget under strict fiscal discipline rules by the Finance Ministry’s expert teams.

The process of setting expenditure ceilings for each Ministry and Deputy Ministry, aimed at controlling spending, was completed last Monday.

The Ministry of Finance (MoF) determined the maximum allowable limits based on all current data—particularly taking into account the unpredictable costs caused by the devastating wildfire in the mountainous region of Limassol.

Compensation payments are expected to total around €120 million, including environmental restoration costs, which will extend into the medium and long term.

Within the broader “spending package,” additional expenses impacting public finances include the first €100 million installment in compensation to depositors and bondholders affected by past banking haircuts, a projected increase in the state payroll due to the upcoming rise in the Cost-of-Living Allowance (COLA), €70 million allocated for projects in Vasilikos, and a possible €25 million “advance” related to Cyprus’ electrical interconnection.

Despite the Finance Minister’s statement that not a single cent will be spent on projects deemed unfeasible, as revealed by Brief, a provision for the interconnection project will still be included in the budget.

This means the European Commission will attribute to the Republic of Cyprus the full €125 million in recoverable costs related to ADMIE, the Greek transmission system operator responsible for the Cyprus-Crete electrical link.

If the government pays the €25 million to ADMIE, the European Commission will subtract the entire €125 million from Cyprus’ current budget surplus of about €600 million. This is in line with EU fiscal policy rules.

Tax Reform’s Impact and the Emerging Gap

The 2026 budget will also account for the impact of the upcoming tax reform on public finances.

According to Brief sources, a study by the University of Cyprus' Economic Research Center revealed a potential deficit of several tens of millions due to the expected reshaping of the tax base for both individuals and corporations.

Exceeding the Fiscal Rule Index Threatens Credibility

Total expenditure ceilings have been set based on Cyprus' fiscal capacity and with the aim of avoiding deviations from the EU’s fiscal rules.

Currently, Cyprus’ fiscal rule index stands at 6.8%, excluding compensation for wildfire victims and unknown costs related to the COLA increase. If the index exceeds 7%, Cyprus may face EU oversight and negative consequences.

As revealed by Brief on June 5, the European Commission had already warned the Finance Ministry about the need to comply with its assigned expenditure ceiling.

"Any deviation from the set spending limits calls into question the achievement of fiscal targets and, by extension, the credibility of Cyprus’ economy," states the country's strategic fiscal policy framework.

Ministry and Deputy Ministry ceilings were also determined based on macroeconomic trends, fiscal forecasts, and commitments under Cyprus’ 2025–2028 National Medium-Term Fiscal and Structural Plan.

A senior Finance Ministry source told Brief that maintaining the sustainability of public finances is a top priority.

They added that, based on new data, public spending was redistributed toward categories with higher added value.

Cybersecurity has also emerged as a top government priority and is embedded in the overall philosophy of the 2026 budget.

The Finance Ministry aims to ensure a fiscal surplus, a gradual reduction of public debt, and control of the government wage bill.

The 2026 budget will also emphasize infrastructure projects, advancing the green transition, digital transformation, and creating conditions for sustainable growth. It will further support structural reforms and improvements in healthcare provision.

In addition, the budget includes the completion of all mature projects, as well as funding for social and housing policies. Significant allocations will be made to strengthen wildfire response measures.

Additional funds are earmarked for road network improvements and the revitalization of mountainous regions.

Source