Cyprus the highest fiscal flexibility in Europe

According to the Ministry of Finance, a recent report by Standard and Poor’s rating and research agency ranks Cyprus first in terms of “fiscal flexibility” among 28 European countries.

The report ranks the 25 EU member states plus Norway, Iceland and Switzerland, in a 2006 fiscal flexibility index.

Cyprus is ranked first, followed by Switzerland and Ireland–also two comparatively small states.

The index allows for cross country comparisons of government’s ability to adjust to adverse economic trends and to react swiftly and effectively in the wake of economic shocks, by modifying tax and expenditure policies in a way that safeguards smooth debt service payments.

While Cyprus leads marginally thanks to the high degree of revenue flexibility afforded by its exceptionally low tax rate regime, flexibility in Switzerland and Ireland stems from both the revenue and the expenditure sides, CNA reports.

It adds that the Cypriot economy is highly dependent on its tax regime to provide a distinctive appeal to foreign investors.

Cyprus rapidly reduced its budget deficit from 6.3% of GDP in 2003 to around 2.5% of GDP in 2005.

Its corporate tax rate on non-governmental companies is the lowest in Europe at 10%.