The Fiscal Council has warned the Ministry of Finance of growing uncertainty in public finances, citing both external and domestic factors that could pose significant fiscal risks.

As Brief reports, in a letter accompanying the submission of the 2026 state budget to Parliament, Council President Christos Persianis cautioned against policy announcements made without prior cost assessments — including those related to taxation, pensions, the Cost-of-Living Allowance (ATA), the General Health System, energy spending, and compensation for natural disasters.

“This uncertainty creates particularly elevated risks for both the broader economy and public finances,” the Council noted, while welcoming the Ministry’s continued conservative fiscal stance.

The Council warned that Cyprus risks exceeding its agreed expenditure limits, as current projections do not fully include the financial impact of the ATA agreement (especially for 2027–2028), or potential new subsidies and energy-related costs. It advised maintaining primary surpluses to protect the economy from future shocks.

While confirming that the assumptions behind the draft 2026 Budget and Medium-Term Fiscal Framework (2026–2028) are realistic, the Council urged continued restraint in public spending, particularly in non-discretionary expenses that “trap the government into pro-cyclical fiscal policy.”

The Council welcomed the projected drop in public debt below 60% of GDP — to 57.4% in 2025 from 65% in 2024 — describing it as a milestone that strengthens Cyprus’s fiscal resilience. However, it warned that sustaining this level through 2028 will require strict expenditure control, given the likelihood of new spending commitments emerging in coming years.

The Council assessed the state’s revenue growth projections as more realistic than in previous budgets, despite not fully reflecting the planned tax reform. It cautioned that avoiding new debt issuance should not become standard practice, as prolonged absence from markets could hinder access to international financing amid rising bond yields.

Mr. Persianis expressed concern over a 17.7% annual increase in operational spending, noting it does not reflect new national needs. He also warned that insufficient investment in energy efficiency and emission reduction measures risks undermining the National Energy and Climate Plan targets.

Despite fiscal pressures, the Council said the economy remains robust and will likely sustain broad-based growth, provided no major policy shifts occur. Inflation is expected to rise in 2026 due to base effects and global adjustments. Emerging challenges in security, energy, and climate are expected to drive additional spending needs in future budgets.