Our View: Not a lot government can do to increase income of lowest paid
The economy was in rude good health in 2025 and all forecasts suggest that we will enjoy more of the same this year, all other things being equal. The general consensus among the institutions that make forecasts is that all indicators will be positive. A growth rate of between 2.6 and 3.5 per cent is forecast for 2026, with a budget surplus of 3 per cent and the public debt falling to just 51 per cent of GDP, well below the Maastricht guideline of 60 per cent.
Some minor negatives such as small rise of the rate of inflation is forecast at 2 per cent – it was below 1 per cent 2025 – but that is a consequence of an economy working at full capacity. Nothing illustrates this better than the low unemployment rate, expected not to exceed 4.5 per cent in 2026. This could create the need for more foreign workers because low supply of labour could lead to upward pressure on wages and consequently prices. This, combined with the interest rate cuts that have boosted the rate of new lending and the expansion of CoLA, could lead to overheating of the economy, in 2026, but it is something that can be managed.
Everything could be turned upside down by external factors such as escalating trade tensions that could affect the export of services and foreign direct investment, geopolitical tensions that could take a turn for the worse and the possibility of energy shocks. These risks are mentioned in all forecasts, but there is little the Cyprus government could do at present.
What appears to be the government’s concern is the widening gap in pay between the lowest paid and the rest of the wage earners, which President Nikos Christodoulides alluded to in an interview in Phileleftheros last weekend. He did not speak about the widening gap in incomes, but mentioned ways the government hopes to boost the disposable income of the lowest earners. While Cyprus had one of the lowest inflation rates in the Eurozone, prices had not come down, after the post-Covid period. “We must strengthen the purchasing power of people’s wages and reduce the cost of necessary expenditure,” he said.
It is the right approach, but how can this be achieved? Christodoulides said that the target was to reduce the price of electricity, increase the purchasing power of wages through CoLA “and other initiatives such as the reform of the tax system” and the increase of the minimum wage. The problem is that these solutions do not go far enough, but there are no magic formulas for improving the widening inequalities. The tax reform will mainly benefit middle income groups rather than those on the increased minimum wage. The same could be said about CoLA, which primarily benefits the well-paid workers of the public service.
The government will maintain lower VAT on a small selection of goods deemed necessities and continue with the slightly discounted electricity rates, but apart from that there is little else it can do for the lowest earners. A big challenge in 2026 could be the cost of housing. There is a government plan for affordable housing, that was also mentioned in the interview, but how many people would benefit? Rents have been steadily rising in the last few years and will have a negative impact on the disposable income of the lowest paid workers, but is there anything that the government can do?
It cannot intervene in the market by imposing rent controls, reducing VAT on more products or keep on increasing the minimum wage; nor can it lower electricity rates again. The reality is that it will have to allow the market to take care of things. As long as the economy remains on a healthy growth path and the inflation rate is kept under control, full employment conditions will push up wages as well.