Greece: 2009 Budget Too Good To Be True

Source: Forbes
Oxford Analytica, January 7th 2009

Economic targets for the new year appear optimistic, if not unrealistic

Before the Christmas recess, the New Democracy government pushed through parliament a revised budget estimate for 2008 and projection for 2009. The 2008 numbers included a general government budget deficit of 2.5% of GDP, based on 3.2% growth, 4.3% annual average inflation and 3.1% real average wage growth. The 2009 forecast included a 2% deficit, 2.7% growth, 3% inflation and 3.5% wage growth.

The targets appear optimistic, if not unrealistic–growth, to this point, has been driven by strong consumption and investment, both of which are in decline, and the budget revenue and expenditure projections appear tenuous.

Doubtful Data
Estimates from December 2007 forecast a general government deficit of 2.7% of GDP in 2007 and 1.6% in 2008. Last spring, Eurostat challenged the Greek statistical service’s data, and the figures were revised upward to 3.5% and 2.5%, respectively. These figures put the Greek 2007 deficit in excess of the 3% ceiling set by the euro-area’s Stability and Growth Pact (Athens was under surveillance from May 2005 to June 2007 for breaching the SGP).

The surveillance process could be repeated, particularly as Eurostat is reportedly considering challenging 2008 data, so that the deficit could exceed 3% of GDP for a second consecutive year.

Dubious Deficit
The 2009 deficit target depends almost entirely upon ordinary budget revenues increasing by 15%–nearly 2.5 times nominal GDP growth. The government expects a significant boost from new taxes on real estate transactions, the harmonization of the special consumption tax on heating and motor fuels, plus special arrangements for settling arrears.

But key to attaining the target will be a significant clampdown on tax evasion, something the government has regularly promised, but like all its predecessors, singularly failed to accomplish.

Extra Expenditure?
The 2009 budget forecasts ordinary primary expenditure rising by 8%, about half the increase in projected revenues, but spending is routinely revised upward at year’s end. Nearly three-quarters is inelastic, going toward public-sector wages and pensions, which are to rise by about 10% in 2009, as the government buys civil service cooperation at a time of political uncertainty.

The authorities have forecast a reduction in the central government deficit by the classic tactic of reducing spending on the public investment budget (PIB), partly because E.U. aid transfers are forecast to run down by more than one-fourth.

The government had some 2 billion euros in Third Community Support Framework aid it was to have spent or lost by the end of 2008. But the Barroso economic stimulus package announced in late November allowed all CSF III aid recipients a six-month extension to help combat unemployment. It also has a special one-year extension to spend some aid in areas damaged by forest fires in August 2007. Greece could therefore draw down all the aid monies that it stood to lose, but to utilize that funding, the government must put up project co-financing, and that prospect is incompatible with the PIB cuts.

The beleaguered Conservative government is gambling that the Greek economy is sufficiently insulated from the global financial crisis that strong GDP growth will continue with only a modest budget deficit, but the economic climate may well deteriorate, depressing its electoral prospects even further.

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