**Fiscal Council: Budget Under Pressure Amid Ballooning Public Payroll**
The Fiscal Council of Cyprus has issued a stark warning regarding the sustainability of the country's budget, highlighting the burgeoning public wage bill as a significant strain on state finances. In its annual interim report, presented by Chairman Andreas Charalambous, the council noted that while the economy demonstrates resilience, government expenditures continue to exceed European Union limits, primarily driven by increasing costs associated with public sector employment.
According to the report, compensation for public employees is projected to have reached approximately €4.1 billion in 2024, an increase from €3.9 billion the previous year. This figure represents nearly 12 percent of Cyprus's Gross Domestic Product (GDP). The general government payroll expenditure has seen a dramatic rise from €3.17 billion in 2022, marking a cumulative increase of about 38 percent over three years. Concurrently, the number of public sector employees has grown from 66,287 to 71,675 during the same period.
Local authorities have experienced an even steeper increase, with staff numbers rising by 17.6 percent. A significant factor contributing to this surge is the automatic mechanisms embedded within the payroll system, notably the cost-of-living allowance (CoLA). This allowance has approached 80 percent restoration under an agreement between the government and labor unions and is expected to rise to 90 percent by July of the following year. CoLA payments alone escalated from €42 million in 2022 to €199 million in 2024, increasing their share of basic salaries from 3.5 percent to 15.3 percent.
Charalambous expressed concerns about the calculation method of the CoLA, which is based on a flat percentage of salary, resulting in disproportionately large sums being allocated to higher earners. While the council does not advocate for the complete abolition of CoLA, it has recommended that the allowance be adjusted to a capped fixed amount, with any further pay increases tied to productivity improvements.
The Fiscal Council emphasized the importance of aligning expenditures with economic growth, cautioning that robust state revenues have thus far obscured the true extent of budgetary pressures. Charalambous pointed out that Cyprus's current fiscal strength provides an opportunity to address the rigidities of the payroll system and the low rate of public investment, rather than allowing the positive financial outlook to foster complacency.
In the first half of this year, the implementation of the development budget was only at 25 percent, a situation attributed to "limited administrative capacity" and inadequate project planning. The council also criticized local government reforms, noting that spending on council employees surged from €144 million to €205 million between 2022 and 2025, contradicting claims that the reforms would rationalize expenditures. It urged a reassessment of these reforms, including the number of municipalities and deputy mayoralties.
The report also linked the pressures on the payroll to Cyprus's compliance with new EU fiscal regulations. It revealed that net primary expenditure exceeded the agreed trajectory by 3.4 percentage points in 2025 and by 2.4 points in 2026, with the Ministry of Finance estimating a cumulative deviation of €403 million. While the government attributes much of this deviation to accounting factors, the council identified a genuine excess spending of 1.2 percentage points.
Looking to the future, Charalambous warned about the implications of Cyprus's ageing population, predicting that the ratio of workers to pensioners could decline from four to one to two to one. He stressed that future economic growth would need to be increasingly reliant on productivity improvements rather than merely on employment growth, an area where the government has not historically excelled.
As the next presidential election approaches, the council cautioned against any loosening of fiscal policy, emphasizing the necessity of maintaining fiscal discipline during periods of heightened electoral pressure. It referenced research indicating that increased pre-election spending does not significantly enhance the chances of re-election for incumbents.
To address these challenges, the Fiscal Council has called for the establishment of a binding three-year fiscal framework, enhanced evaluation of public investments, and a more restrained approach to recruitment based on documented operational needs rather than automatic replacements of departing employees.
In conclusion, the Fiscal Council's report underscores the pressing need for Cyprus to reassess its public payroll strategies and fiscal policies to ensure long-term economic stability and compliance with EU regulations.