It has been business as usual with the preparation of the Cyprus government budgets for 2026 to 2028 with little attention being paid to addressing current and future policy challenges, including narrowing mounting economic inequalities, effectively implementing essential infrastructure projects, providing decent civil and social protection and combatting prolific tax evasion.

Unfortunately, the proposed budgets just read as a mechanical updating of past budgets with the revenue and expenditure estimates not adequately reflecting promised reforms and policy measures.

Members of the House of Representatives in their discussion of the government’s budgets for 2026 to 2028 should, first, focus, on the big picture.

That is, what are the aims of the budgets, the assumptions on which they are based, and the policy objectives for the future path of the economy?

Focus of MPs should not be just on amending specific items in the proposed budget for 2026.

Why is it that the prime objective for the budgets for 2026 to 2028 is to continue to generate relatively large surpluses averaging 3.5 per cent of GDP and piling-up excessively large deposits at banks at a time of large shortfalls in spending on development and social needs?

Furthermore, why does the government need to produce primary surpluses when the projected government debt to GDP ratio of 58 per cent at end 2025 has moved below the “critical” 60 per cent EU level?

MPs should realise that by producing large surpluses, the government is taking much money out of the economy and substantially reducing the purchasing power of households and businesses.

It is no coincidence that the prices of certain consumer items, such as clothing and footwear, have fallen over the last year as people can’t afford to buy these products at current prices.

In sharp contrast to most EU countries, the Cyprus government persists in pursuing a policy of fiscal austerity by spending relatively small amounts on social needs compared with EU counterparts and by grossly reducing capital expenditures from a lowly projected 3.4 per cent of GDP in 2025 to 2.1 per cent by 2028.

In fact, Cyprus government spending on social protection per inhabitant in PPS amounted to €6,845 in 2023, that is, 40 per cent below the average for euro area members of €11,457.

At the same time, the government seems to be primarily interested in spending taxpayers’ money on itself, including remunerating the president, ministers, advisors and top civil servants with generous salaries and travel expenses and arrangements.

And apart from favoured business contractors and cronies, the government doesn’t seem to care about the rest of the population and prefers to overwhelmingly appeal to credit rating agencies with fiscally austere policies, so as to demonstrate, albeit misleadingly, with resultant credit upgrades that the economy is being well-managed.

The majority of MPs with their silence implicitly support such government policies!

In addition, MPs need to question whether the details of the proposed tax reform have been factored into the budgets for 2026 to 2028? Is the tax reform involving changes in tax rates and tax deductions fiscally neutral as Minister of Finance Makis Keravnos claims?

Furthermore, MPs need to question how the broadening of the tax base as stated also by the minister will be accomplished. Is it by stricter and better tax enforcement and compliance, including requiring all persons over 25 years to lodge tax returns, and/or by the levying of new taxes?

And, are the details of the recent agreement on CoLA, including the granting of tax incentives to private sector employers providing CoLA over two years to their employees being accounted for in the budget estimates?

Unfortunately, the government budgets are not being deployed to address the real problems of Cyprus, such as the need to expand and upgrade infrastructure to provide adequate, reliable and affordable electricity and water supply to businesses and households, and to significantly narrow inequalities in income, wealth and job opportunities.

Indeed, it was the issue of the affordability of food, energy and housing for the residents of New York, that was highlighted in the campaign of Zohran Mamdami for the Mayor of New York, which propelled him to victory.

In this connection do the proposed government budgets and the tax reform for Cyprus aim to deal seriously with the issue of affordability for Cyprus households?

While the zero VAT on particular basic consumer items in Cyprus has been extended to end-2026, the tax reform should include additional reductions in regressive indirect taxes and the introduction of progressive taxes on the incomes and property purchases and wealth of the rich so as to finance greater tax deductions for lower and middle-income households.

These suggested changes in taxes could be incorporated gradually into the budgets from 2026 to 2028 in order to raise the purchasing power of the lower and middle-income households relative to those of higher-income “earners”.

And how serious are the Cyprus authorities about combatting tax evasion? The proposed tax reform includes measures directed at tackling tax evasion including raising fines on tax offenders and criminalising the non-payment of income taxes. However, the projected budget revenue estimates do not show that there will be any significant progress in reducing tax evasion since income tax collections from tax-evading self employers are only projected to rise by 1.95 per cent to €82 million in 2026 followed by no increases in both 2027 and 2028.

In marked contrast, income tax collections from employees are projected to rise by 6.1 per cent in 2026 to €1.2 billion by 5.9 per cent in 2027, and by 5.4 per cent in 2028.

And the much greater taxing of employees compared to self-employed persons comes on top of the fact that employees paid on average €2,080 in income taxes in 2024, whereas self-employed persons paid just €1,600.

Alas, these projected income tax collections in the budgets contribute to making a mockery of official statements that the tax reform will lead to a “fairer distribution of incomes and wealth”.

Furthermore, Tax Department officials have revealed that there is a very large shortage of employees required for administering the tax system, including tackling the acute problems of tax evasion and avoidance.

In so far as around 100 vacant positions exist in the Tax Department do the budgets allocate sufficient funds for filling these positions? 

Even if MPs agree with the deficiencies of the government budgets in responding to the above questions, it would not be wise to attempt to completely overhaul them at this time, since major adjustments such as the introduction of a new tax say on immovable properties can’t be done overnight.

Other recommended changes like boosting effective spending on infrastructure projects requires greater institutional competence to be accomplished.

This said, MPs should arrest the government’s fixation with generating large surpluses and accumulating excessive amounts of cash by calling for the raising of budget allocations for social and civic protection, for increasing the number of tax administrators and for resources to substantially improve the competence of the state to effectively implement development projects.

In addition, budget surpluses could be scaled back by immediately reducing indirect taxes, that in turn would enable lower and middle-income earners in particular to raise their purchasing power.

Finally, along with delaying and overhauling the woefully deficient proposed tax reform, certain recommended changes impacting on government budgets such as new taxes and tax incentives should be later incorporated into the budgets for 2027 and 2028.