Cyprus Growth Level In 2005

by Lorys Charalambous, Tax-News.com, Cyprus

20 March 2006

Figures released by the Cyprus Statistical Service last week show that GDP increased by 3.8% last year, marginally down from 3.9% in 2004. In recent budget projections, the government had assumed growth of 4.1% in 2005, rising to 4.2% in 2006.

The construction sectors led the way in 2005, growing at 5.9%, although this is less than the 6.5% notched up in 2004. Given that the housing market has flagged in 2005, it may be difficult for the country to match the government's hopes in 2006. The govenrment has also set itself tough deficit reduction targets in the run-up to euro-zone membership in 2008.

In its Convergence Programme, submitted to the European Union earlier this year, the Cypriot government forecast that the tax burden will nudge up from 34.7% of GDP in 2005 to 35% in 2006 and then to 35.1% in 2007, before edging down to 34.9% in 2008 and back to 34.7% in 2009. The Cypriot government has announced that it expects the country's tax burden to rise slightly over the course of 2005/2006, but envisages a decline in the size of the tax burden to current levels in the medium term if the authorities can adhere to their fiscal plans.

"The achievement of the medium-term objectives of Cyprus depends crucially on the continuation of the fiscal consolidation effort and more specifically on containing the growth of public expenditures below the nominal GDP growth, and on improving tax performance," the report stated.

However, the government indicated that it would be prepared to instigate "additional corrective measures," should economic growth dip below forecasts, or if fiscal reforms are delayed.

Hoping to adopt the euro currency by 2008, which requires that member states have sound control of fiscal policy and budget deficits, the government is targeting a reduction in the budget deficit to 2.5% of GDP in 2005, down from 4.1% in 2004. By 2009, it is envisaged the deficit will fall to 0.6% of GDP.

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