Finance Minister Makis Keravnos presented the 2027 state budget to the council of ministers on Wednesday. Considering this is the state budget with which President Nikos Christodoulides will seek re-election, it was not as expansive as we had feared, although Keravnos could have shown a little more caution given the uncertainty that marks the world economy.

The minister did not hide this during the presentation. While acknowledging the “admirable resilience displayed by the Cyprus economy,” Keravnos also warned that “according to the basin macroeconomic scenario, the prospects of the economy in the medium term remain positive, but with a significant degree of uncertainty.” The finance ministry was currently in the process of reviewing and adjusting its macroeconomic and fiscal forecasts which were based on estimations made in April as conditions have changed since.

The budget will be €11.1 billion, approximately €470 million higher than this year’s. According to the finance ministry’s forecasts, the growth rate in 2027 will be 2.9 per cent (up from 2.7 this year), the fiscal surplus 2.8 per cent of GDP (up from 2.3 per cent) and the primary balance will reach 4 per cent of GDP. Public debt will fall from 50 per cent this year to 46.6 per cent of GDP and unemployment will remain at 4.5 per cent.  

These indicators reflect a healthy, smoothly running economy, but there is one figure that is worrying. This year’s rate of inflation is at 4.5 per cent and, given the world situation, the government has been unrealistically optimistic in forecasting a rate of 2.5 per cent for 2027, especially as the higher prices are imposed from outside and there is very little government could do to keep them under control.

The Bloomberg commodity index which covers energy, grains and industrial metals rose 48 per cent this year. Shipping and freight costs have gone through the roof while energy prices are unlikely to return to normal levels any time soon. Brent futures contracts, until spring 2027, are above $90 per barrel. Grains futures prices are also higher than spot prices. And then there is the destruction caused to oil pipelines and refineries by the wars in Iran and Ukraine/Russia which are restricting the supply of crude oil. The soaring prices of diesel, petrol and jet fuel will have an impact on prices everywhere and higher air fares will affect Cyprus tourism.

Even if the wars end by the end of this year, it will take many months for prices to start falling. This is why more caution than usual was imperative in preparing the 2027 budget. Another year with a high rate of inflation – the 2.5 per cent forecast could turn out to be more a case of wishful thinking than economic pragmatism – could turn all the government’s forecasts upside down. Things will be made more difficult by the fact that an election campaign would be taking place in a setting of rising prices, which the government would feel under pressure to tackle.

High inflation would also have an impact on the public payroll, which Keravnos has made it his target to keep under control, via CoLA. The businesses that pay CoLA will also be faced with higher wage bills that will push up prices further. While this will mean higher tax revenues for the state, it is also likely to cause more social unrest with more people facing difficulty making ends meet.

On Friday the ratings agency Standard and Poor’s upgraded Cyprus’ credit rating from A- to A and the minister as well as the president, justifiably, attributed this to their government’s sound management of the economy. This should not, however, lead to complacency, because we live in uncertain times and nobody can predict in what direction the world economy will go next year. This is why it would have been advisable for the finance ministry to have erred more on the side of caution when preparing the 2027 state budget.