Eurobank analysis highlights Cyprus' economic resilience and strong performance

Cyprus continued to outperform most eurozone economies in fiscal balance in 2025, according to analysis released by Eurobank research economist Michail Vassileiadis, based on preliminary fiscal data and the first estimate of gross domestic product.

The analysis stated that Cyprus outperformed most eurozone peers in fiscal balance for a fourth consecutive year, continuing a trend seen between 2022 and 2024 when the country recorded the highest overall fiscal surplus in the eurozone.

Vassileiadis estimated that Cyprus recorded an overall surplus of 2.6 per cent of GDP in 2025 and a primary surplus of 3.7 per cent of GDP, excluding interest payments.

Although these figures marked a decline from the 2024 peaks of 4.1 per cent and 5.4 per cent of GDP respectively, Cyprus still maintained a leading position in the eurozone.

Based on fiscal balance projections in the European Commission European Economic Forecast of November 2025, Cyprus remained the top performer in overall balance terms across the eurozone in 2025.

At the same time, the country ranked second in the eurozone in primary balance terms behind Greece, according to the analysis.

Vassileiadis said that the fiscal outcome was notable because elevated fiscal surpluses were achieved despite policy easing on both revenue and expenditure fronts.

The reduction in value added tax on electricity introduced in April affected government income, with VAT receipts declining by 1.7 per cent in 2025, compared with a 6.4 per cent increase recorded in 2024.

Public sector wages and pensions were also increased beyond the standard partial indexation mechanism for the first time since 2009, according to the analysis.

As a result, public sector wage expenditure rose by 6.5 per cent while pension spending increased by 7.6 per cent.

Despite these developments, total government revenues expanded by 5.9 per cent in 2025, compared with a 7.4 per cent increase in 2024.

The rise in revenue was primarily supported by higher social security contributions which increased by 7.9 per cent and corporate income tax receipts which grew by 9.5 per cent.

On the expenditure side, total government spending increased by 10.3 per cent in 2025, compared with growth of just 1.0 per cent in 2024.

This rise was driven mainly by the previously mentioned increases in compensation of employees as well as higher social transfers other than in kind, particularly during the first quarter.

Additional spending pressures also came from higher gross fixed capital formation and increased pension outlays, the analysis said.

Vassileiadis explained that the revenue categories supporting fiscal performance in 2025 reflected structural tailwinds in the Cypriot economy.

“These include tax incentives introduced in 2022 to attract foreign nationals to work and or establish businesses in Cyprus, as well as sustained strength in construction activity,” he said.

The effects of these factors are visible in labour market data, with employment increasing by 2.7 per cent in 2025 to reach a new all time high, according to the analysis.

Growth in employment was mainly driven by professional, scientific and technical services and construction, Vassileiadis said.

Additional job creation also came from administrative services as well as financial and insurance activities.

“These sectors have benefited from ongoing transformation through mergers and acquisitions,” he said.

Looking ahead, the economist said that the sustainability of fiscal surpluses above 3.0 per cent of GDP projected in the government’s medium term fiscal framework will depend on the resilience of these structural drivers.

Over the period between 2026 and 2028, corporate tax revenues and social security contributions are expected to remain the main sources of revenue growth, according to the analysis.

By contrast, personal income tax revenues are projected to decline modestly through 2028 following the recently introduced reform of the tax system.

However, the reduction in the effective tax burden, particularly for low and middle income earners, is expected to support labour market participation.

Labour force participation reached 65.2 per cent in 2025, close to the 65.5 per cent recorded in 2023, according to the analysis.

The economist also highlighted the growing role of foreign workers in the Cypriot labour market.

“Foreign workers accounted for more than 90 per cent of employment growth over 2023 to 2025,” he said.

These trends are expected to support further increases in social security revenues over the coming years, the analysis added.

Vassileiadis also examined the implications of the planned increase in the statutory corporate income tax rate to 15 per cent from 12.5 per cent starting in 2026.

“The net revenue impact will depend critically on the elasticity of operating surplus with respect to the tax rate,” he said.

Despite the planned increase, Cyprus will remain among the four lowest corporate tax jurisdictions in the European Union, alongside Hungary, Bulgaria and Ireland.

As a result, the country is expected to preserve its relative competitive positioning within the EU, according to the analysis.

“Provided that the geopolitical environment remains relatively stable, business activity could also sustain robust public finances,” he said.