CYPRIOT MPs have approved a tight austerity budget for 2013 touted as the "most crucial" in the island's history as Nicosia tries to secure a bailout deal to rescue troubled banks and pay salaries.
The state budget incorporates harsh spending cuts and tax hikes that were agreed in talks with a troika of international lenders.
The budget was passed late on Wednesday with 51 votes in favour and only two against.
Total public expenditure for 2013 is projected at 9.5 billion euros ($A12.1 billion), whereas GDP will decline to 17.49 billion euros, marking a two per cent drop from 17.85 billion euros in 2012.
The budget also includes a 7.25 per cent fiscal adjustment target dictated by international lenders.
Finance Minister Vassos Shiarly had urged MPs to pass the 2013 budget to help Cyprus rebuild its broken economy as it faces an unprecedented recession. He called it the "most crucial" budget in the island's history.
Cyprus has been unable to borrow from international markets since July last year due to its Greek-exposed banks and junk rating from credit agencies.
The economy is predicted to shrink by 2.4 per cent in 2012, falling deeper into recession at 3.5 per cent in 2013 and slow down to -1.3 per cent in 2014.
By cutting expenditure and improving revenue, Cyprus hopes to streamline the fiscal deficit to 4.4 per cent from an expected 5.5 per cent of GDP this year.
The bailout memorandum covers a four-year period with the aim of Cyprus achieving a four per cent budget surplus in 2016.
The troika of lenders - the European Commission, European Central Bank and International Monetary Fund - is expected to make its recommendation to the eurogroup on January 21.
Inflation on the island is expected to fall to two per cent next year from 2.5 per cent in 2012 due to a lock on consumer spending.
To make savings, the government will gradually increase the retirement age in the public service to 65, chop generous allowances for senior officials and reduce the number of employees on the state payroll.
And while the economy slips deeper into recession, unemployment is forecast to reach 12 per cent in 2012, jump to 13.8 per cent next year and 14.2 per cent in 2014.
Due to the euro crisis, the public debt will increase to a minimum 92 per cent of GDP in 2013 from 85.8 per cent this year.
Total budget expenditure, including loan payments, is set at 9.45 billion euros, 7.5 per cent higher than the 8.80 billion euros for 2012 - compared to a total income of 7.62 billion euros.
The state payroll, including pensions, is expected to reach 2.60 billion euros, a 5.3 per cent drop from 2.74 billion euros in 2012 due to a wage freeze and reduction in the workforce.
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