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Government Tax Reform Fails to Address Structural Inequalities

by THEFUTURE.TEAM

December 29, 2025

Unfulfilled Potential In Economic Reform

The recent approval of the government budgets for 2026-2028 and an accompanying tax reform under President Nikos Christodoulides may have been touted as progressive steps towards modernizing Cyprus’ tax system. However, these measures fall short of catalyzing balanced and equitable economic growth. Rather than initiating substantive change, they primarily serve the interests of middle-income households and bolster the profitability of larger enterprises.

Short-Sighted Policies And Persisting Inequalities

The revisions criticized as making the tax system “fairer, more modern, and more competitive” hardly qualify as a robust reform. With soaring bank deposits and fiscal surpluses reaching €5.8 billion (as of November 2025), the government had the means to significantly reduce taxes on lower and middle-income earners and trim the VAT on essential goods and services. Instead, the tax reform maintains the status quo—perpetuating income disparity and failing to account for prolonged challenges such as inflation and demographic shifts.

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Furthermore, current measures largely favor established public companies. Even with the corporate tax rate increase from 12.5% to 15% for firms exceeding €750 million in annual revenues, the reform offers generous concessions including the abolition of the deemed dividend distribution system, a reduction in tax on actual dividend payments from 17% to 5%, and the Notional Interest Deduction scheme which can drive effective rates as low as 2.5%.

Misplaced Incentives And Underutilized Resources

The reform’s emphasis on tax incentives for green, digital, and innovative ventures is a step in the right direction. However, these incentives are undermined by a broader fiscal policy that over-prioritizes investments in property development, construction, retail, and hospitality sectors—industries that inherently rely on low-wage, low-productivity labor. This imbalance is evident when comparing Cyprus’ labor costs of €21 per hour to the EU average of €33.5 per hour in 2024. Consequently, these policies foster an environment where wage suppression and resource allocation remain skewed in favor of established, profit-centric enterprises.

Policy Recommendations For A More Equitable Future

A more impactful tax reform should address both immediate fiscal imbalances and long-term socio-economic challenges. First, a commitment to index the tax-free thresholds, higher tax rates, and tax deductions to inflation at regular intervals (akin to practices in Germany) would help preserve real disposable incomes over time.

Second, to mitigate escalating wealth inequalities—where the top 10% of income earners now command over 66% of net wealth—it is imperative to reinstate a progressive annual tax on the updated market value of immovable properties. This measure would serve to broaden the tax base and promote a fairer distribution of economic benefits.

Conclusion: A Missed Opportunity

While the tax reform introduces attractive incentives for innovation and competitiveness, its overall structure continues to support resource distribution that benefits entrenched interests. By failing to realign investments toward sectors that nurture productivity and decent job creation, Cyprus risks entrenching low-income dynamics and widening the wealth gap further. The government’s fiscal strategy must evolve to ensure a truly modern, competitive, and inclusive economy that elevates living standards for all its citizens.

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ECB Launches Geopolitical Stress Tests For 110 Eurozone Banks

The European Central Bank is preparing a new round of geopolitical stress tests aimed at assessing potential risks to major financial institutions across the euro area. Up to 110 systemic banks, including institutions in Greece and the Bank of Cyprus, will take part in the exercise, which examines how geopolitical events could affect financial stability.

Timeline And Testing Process

Banks are expected to submit initial data on March 16, 2026. Supervisors will review the information in April, while the final results are scheduled to be published in July 2026. The process forms part of the ECB’s broader supervisory work to evaluate financial system resilience under different risk scenarios.

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Geopolitical Shock As The Primary Concern

The stress tests place particular emphasis on geopolitical risks. These may include armed conflicts, economic sanctions, cyberattacks and energy supply disruptions. Such events can affect banks through changes in market conditions, borrower solvency and sector exposure. Lending portfolios linked to regions or industries affected by geopolitical developments may face higher risk levels.

Reverse Stress Testing: A Tailored Approach

Unlike traditional stress tests that apply the same scenario to all institutions, the reverse stress test requires each bank to define a scenario that could significantly affect its capital position. Banks must identify a geopolitical shock that could reduce their Common Equity Tier 1 (CET1) ratio by at least 300 basis points. Institutions are also expected to assess potential effects on liquidity, funding conditions and broader economic indicators such as GDP and unemployment.

Customized Risk Assessments And Supervisor Collaboration

This methodology allows banks to submit risk assessments based on their own exposures and operational structures. The approach is intended to help supervisors understand how geopolitical events could affect institutions differently and to support discussions between banks and regulators on risk management and contingency planning.

Differentiated Vulnerabilities Across Countries

A joint report by the ECB and the European Systemic Risk Board indicates that countries respond differently to geopolitical shocks. The Russian invasion of Ukraine led to higher energy prices and inflation across Europe, prompting central banks to raise interest rates. Belgium, Italy, the Netherlands, Greece and Austria experienced increases in borrowing costs and lower investor confidence. Germany, France and Portugal recorded more moderate changes, while Spain, Malta, Latvia and Finland showed intermediate levels of exposure.

Conclusion

The geopolitical stress tests will not immediately lead to additional capital requirements for banks. Their results will feed into the Supervisory Review and Evaluation Process (SREP). ECB supervisors may use the findings when assessing capital adequacy, risk management practices and operational resilience at individual institutions.