The government accounted for about 12 to 13 percent of GDP during the 1980s (see table 10, Appendix). The need to stimulate the economy after the division of the island in 1974 caused the government to abandon the old policy of balanced budgets and to adopt expansionary fiscal and monetary policies. The results were large and widening budget deficits paid for by borrowing at home and abroad. Domestic public debt rose from C£7.5 million in 1976 to C£161.5 million in 1988. Public and publicly guaranteed foreign debt increased from C£61.8 million in 1976 to C£602.5 million in 1988. The total public and publicly guaranteed domestic and foreign debt rose from C£760.8 million in 1987 to C£764 million (38.7 percent of GDP) in 1988. The foreign debt service ratio (total service payments as a percentage of exports of goods and services) was 11.8 in 1987 and 10.8 in 1988. Domestic borrowing only was used to cover the budget deficit in 1988. Thus, there was a decline in government foreign borrowing in 1988 to C£602.5 million, compared to C£617.5 million in 1987. Still, the burden of servicing the foreign debt continued to be significant. For instance, servicing the external debt was more than half the revenue from exports of domestically produced goods in 1987.

Furthermore, it was anticipated that the tariff reductions that would result from the Customs Union Agreement with the EEC would produce revenue losses, raising the fiscal deficit to C£126 million in 1992, compared with C£73.5 million in 1987. As a consequence, both public and foreign debts were expected to increase. The president of Cyprus, George Vassiliou, forecast a rise in the per capita public debt from C£2,107 in 1987 to C£3,563 in 1992 and a rise in the total foreign debt to C£1,082 million in 1992.

Given the government's ever-present fiscal deficit, there were concrete proposals at the beginning of the 1990s for the introduction of a value added tax (VAT--see Glossary) to improve the state's finances. The Republic of Cyprus lacked a broad-based consumption tax, and a VAT would generate much revenue. The income tax system was also to be overhauled, to reduce tax evasion.

A specific look at government public finances shows that the Republic of Cyprus maintained three types of budgets: the Ordinary Budget, which included expenditures for government operations and other current expenses the Development Budget, which included development programs and the Special Relief Fund, which covered state aid for the housing and care of refugees.

Data as of January 1991