Cyprus: the composition of government revenues, 2002-2008

This Country Focus assesses the extent to which the recent tax-revenue increases in Cyprus is of a permanent nature or whether is of temporary nature, linked to short lived asset boom. Between 2002 and 2008 the Cypriot economy grew at an annual average rate of about 3½% in real terms, significantly above the euro area. In parallel, total tax receipts increased on average at 11% per year, leading to an average annual elasticity with respect to GDP of about 1½. This increase in tax revenues has contributed significantly to the improvement of the Cypriot budget balance. This Country Focus shows that a large part of the increases in tax revenues is structural, being the result of tax harmonisation measures adopted in the run-up to EU accession. However, the developments which led to the remarkable revenue performance in 2007 are likely to be of a more temporary nature, linked to short lived asset boom. This calls for maintaining fiscal prudence, especially in the light of the high external imbalance.