A finance ministry official has revealed that Cyprus's budget deficit forecast for 2005 has been revised down to 2.5% of gross domestic product from an initial forecast of 2.9%. By 2006, the government expects the budget deficit to have fallen further still, to 1.7.%, provided that cost cutting measures are seen through.

European Union member states which adopt the euro must ensure that their budget deficits do not exceed 3% of GDP. Cyprus became a member of the EU in May 2004 and is hoping to join the eurozone by 2008.

The faster-than-expected reduction in the budget deficit has been brought about mostly by higher tax receipts, which were up by 8.7% in the first 10 months of the year to £504.9 million. Increasing VAT receipts accounted for a substantial proportion of these tax revenues, while tax revenue figures released last month also showed that higher activity by offshore companies contributed to a 16.5% increase corporate tax receipts in the year to the end of September.

However, the recent tax amnesty, which concluded earlier in the year, has also helped to put black ink in the government's books, bringing in an additional CYP119 million in revenues from a total of CYP2.5 billion in declarations.

Those coming forward under the first phase of the amnesty scheme, which lasted until January 31 2005, faced a tax of 5% on their newly declared income. This tax rate increased to 6.5% in the second phase, which lasted until the end of February.

According to the finance ministry official, these additional revenues helped to wipe 1% off the budget deficit this year. However, he also pointed out that this is a one-off bonus for the government, masking the structural nature of the deficit, which remains at 3.5% of GDP when the amnesty cash is factored out of the figures.