Cyprus Finance Minister Makis Keravnos presented the 2026 state budget to Parliament’s Finance Committee on Monday, outlining measures for fiscal stability, social support, and economic growth, while rejecting claims that he withheld studies on the Great Sea Interconnector (GSI) electricity project.
The Minister defended his handling of the GSI project, rejecting claims that his ministry withheld key studies on the project’s viability.
Responding to comments by Greece’s Energy Minister, Keravnos said reports suggesting he had ‘kept back’ studies on the Cyprus-Greece-Israel electricity link were ‘fake news.’ He clarified that all studies were commissioned by the Energy Ministry, submitted properly, and shared with both the Cypriot and former Greek ?nergy ?inisters. ‘Everyone is aware of the studies and their findings,’ he said, adding that while he remains open to any project that benefits the economy, he also has a duty to assess financial implications and voice concerns.
Keravnos also wondered about claims the European Commission is pushing the project forward despite doubts over its financial sustainability, recalling that the European Investment Bank declined to finance it for that very reason. Both the GSI and the halted Vasilikos LNG terminal, he said, are listed as fiscal risks in the 2026 budget.
Tax reform and spending priorities
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Keravnos announced that the long-awaited tax reform package is nearly ready and will be submitted to Parliament ‘within the month or, at the latest, next month.’ The reform, he said, aims to maintain state revenues while achieving a fairer distribution of the tax burden. Measures include higher thresholds for large families and those leaving the workforce through voluntary exit schemes, and targeted support for children, housing, and the green transition.
He stressed that preserving Cyprus’ ‘A’ credit rating from international agencies depends on fiscal prudence and reforms that enhance fairness and resilience. ‘This is not social policy per se, but it brings multiple benefits to households and the economy,’ he said.
Addressing the public sector wage cost, Keravnos said its expansion is not due to staff numbers but to ‘the many pay scales and automatic increments’ under review. He noted that the wage share of total expenditure has dropped to 27.5% in the 2026 budget, compared to around 30-35% in previous decades. Teleworking and rationalising transfers and secondments are among the measures under consideration.
Fiscal risks in State Budget report
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The Minister of Finance referred to the Fiscal Risk Report, which identifies a series of factors that could potentially undermine the country’s fiscal stability.
According to the report, one of the main risks concerns the possible activation of liabilities arising from state guarantees, including unsustainable pension funds and pending court decisions that may result in significant fiscal burdens.
The report also flags concerns about the financial performance of state-owned entities and local authorities, as well as the risk of fines from the European Union for non-compliance with the acquis communautaire.
Serious concern was also expressed over the continued need to finance deficits of the State Health Services Organisation (OKYpY) beyond the period provided by law and its extensions.
The report further lists as significant fiscal risks the suspension of works on the Vasiliko natural gas terminal project and uncertainties surrounding the Greece-Cyprus-Israel electricity interconnection (GSI).
It also highlights the potential for unforeseen expenditures linked to climate change, such as wildfires, drought, and increased agricultural compensation payments.
The report also draws attention to the broader geopolitical and economic developments within major EU economies currently facing headwinds – developments that may affect the eurozone as a whole and, by extension, Cyprus. The issue of tariffs in international trade relations is also mentioned among the external risks.
Growth, defence and social policy
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The 2026 budget projects revenue of pound 10.7 billion and expenditure of pound 13.7 billion, with a primary surplus of 5% of GDP and an overall surplus of 3.9%. Growth is forecast at 3.1% for 2026, inflation at 2.1%, and unemployment falling to 4.5% by 2028. Public debt is expected to decline to 52.7% of GDP.
Keravnos described the budget as one of ‘growth, stability and social cohesion,’ highlighting increased social spending (6.7%) and investments in defence, housing, and disability support exceeding pound 100 million through 2028. He also pointed out the continued investment in infrastructure and green and digital projects.