Our View: Good economic indicators hide worrying trends

The government never misses an opportunity about the healthy public finances which it invariably credits to its prudent economic policies. Are its economic policies prudent or has it been fortunate that the large influx of foreign workers – many high-earners – have been contributing large amounts of money to state coffers and boosting consumption as well as pushing up property rents? In fairness, all the main economic indicators are impressive. Once again, we will have a surplus budget, the growth rate is at a good level, and the public debt is now less than 50 per cent of GDP. These indicators are the reason the international ratings agencies have been regularly upgrading Cyprus’ credit rating and writing positive reports about the economy’s prospects. Despite the positive indicators, there are worrying signs regarding the growing inelastic state expenditure, a trend which has been highlighted by several political parties as well as by the independent fiscal council. In 2027 state revenue will increase by 1.1 per cent while expenditure will grow by 4.4 per cent. While there will be a budget surplus thanks to large amounts flowing into the social insurance fund, this cannot disguise the worrying, steady increase of the public payroll. This was the main criticism of Disy leader Annita Demetriou, who accused the government of opting for horizontal pay rises, increasing recruitment and imposing untargeted measures. A much more critical report was issued last month by the Fiscal Council, which warned that the continuous increase of the payroll and other inelastic expenses would increase the pressure on public finances in the years ahead. The payroll was increasing at an annual rate of 7 per cent, much faster than the GDP. The general government’s payroll expenditure had increased from €3.17 billion in 2022 to €4.16 billion in 2025, a cumulative increase of a staggering 38 per cent. For the same period the number of public employees increased by 8.1 per cent. The Fiscal Council also mentioned the lunacy of paying CoLA, the cost of which had risen to €199 million in 2025, five times what it had been in 2022. And it will add a sizeable amount to the payroll in 2027 thanks to the high cost of living index. The government’s economic prudence does not extend to the public sector. If anything, it has squandered public money on hiring more public employees and horizontal pay rises, because its tax revenue has been steadily increasing. Of course, the extra revenue could have been used for infrastructure projects, for targeted measures for people below the poverty line and the improvement of state services. Instead, it has gone on increases for the overpaid, least productive workers of the economy. This could not be described as prudent management of the economy, even if the indicators remain good.