The Fiscal Council has urged the government to be wary of expenditure increases, which may be obligatory to face challenges but could derail the state’s finances.
In its interim report, the financial watchdog, while taking note of the resilience of the economy, it noted concern over growing expenditures, “which, to some extent, are expected following a change in government”.
However, as the council warned, expenditures could increase due to challenges in the global arena.
“The fiscal picture currently remains stable despite significant increases in spending.
“Naturally (and as expected), the assumption of power by a new government also entails increased spending.
“This phenomenon is common, but it exerts significant pressure on public finances, despite the continued increase in revenues”, it noted.
In its report, the Fiscal Council attributes the increase in expenditure to new policy priorities, inflation and migration.
“The change in government leads to a differentiation of priorities and new expenditures related to new policies.
“These include costs resulting from new social continuity policies, such as the revision of the Cost-of-Living Allowance.”
Inflation leads to an increase in operational and development costs of the Republic, including mature projects.
And the state may have to step up spending to deal with growing migration flows.
“In the near future (the next 24 to 36 months), there is a high risk of new large expenditures, some of which will prove unavoidable,” said the Fiscal Council.
There are huge expenses regarding the country’s transition to a green and digital economy, defence and energy security.
Costs to combat climate change results, such as coastline protection from floods, and other challenges, such as possible wildfires, could also arise.
The Fiscal Council said the EU Recovery and Resilience Fund expects to cover most of these projects but will still burden state finances.
“The Cypriot economy continues to record significant resilience despite ongoing uncertainty, with growth expected to remain close to 2.5% GDP.”
According to the Fiscal Council, the labour market is expected to remain stable, with a marginal increase in unemployment rates, but the economy will continue to produce new job opportunities.
“Credit risk remains high, partly due to increased interest rates and continued economic uncertainty.
“Slowing credit growth is not currently a cause for concern, but it is putting pressure on growth.
“Growth will be driven mainly by private consumption, but also the recovery of tourism revenues.
“The technology sector’s contribution to the economy’s growth will also be important.
“Inflation is expected to decelerate significantly and move below 4% for the year.
“The reduction in fuel prices (-14.1% until May and -20% in June) will play a role in bringing down inflation.
“However, some categories of food (non-seasonal) and electricity continue to exert upward pressure on inflation, while non-tradable services are expected to continue to register strong increases, putting pressure on household budgets.”