Budget to believe in instead of hope for?
Next year’s targets are ambitious and based on strong growth, but 2016 has provided some positives
ANALYSIS There was a time not too long ago that Greece’s national budgets were a bit like the speed limits on the national roads: Numbers that you would like everyone to keep to but which nobody had any real intention of abiding by.
Things have changed in recent years as a result of Greece being under an international bailout program and having to meet the strict fiscal targets set by its lenders, the eurozone and the International Monetary Fund.
Rather than a photo opportunity and a moment to share in platitudes and wishful thinking, the tabling of each year’s national budget sets the political and economic tone for the months ahead. They explain how the government plans to meet the exhaustive and exhausting goals agreed with the creditors and provide a precise guide to understanding if the fiscal and macroeconomic data during the course of the year show that Greece is on course or veering off track.
The 2017 budget was submitted to Parliament on Monday in what could prove a landmark moment during the Greek economic crisis. If the economic plan for next year proves accurate, Greece will experience the kind of growth it has not seen in more than a decade. If the government’s projections are correct, Greeks will be able to start believing for the first time since they entered economic hardship in 2009 that the worst is behind them.
The budget foresees a mild recession of 0.3 percent this year and strong growth of 2.7 percent of gross domestic product in 2017 so economic output passes the 180- billion-euro mark, which is in line with what the European Commission has predicted. Many economists believe that the forecast is overly ambitious and Greece would be lucky to see an increase of more than half of what is being projected.
Years of disappointment
The truth is that after so many years of disappointment it is difficult to see how the Greek economy can turn around so quickly and convincingly. At the same time, though, there are a number of variables that make it difficult to predict convincingly exactly what will happen next year.
Officially, the budget sees the recovery being driven mostly by a rebound in private consumption, which is expected to increase by 1.8 percent, a 9.1 percent rise in investment and exports shooting up by 5.3 percent.
The secret ingredient, though, is what will come out of Greece’s ongoing negotiations with the institutions. Should the second review of the current adjustment program be concluded soon, leading to an agreement on short-term relief measures and the fleshing out of the steps that will be taken to reduce Greece’s public debt after the end of the bailout in 2018, as the government hopes, the prospects for strong growth next year will be much better.
“For Greece, it is much better to specify the [medium-term] measures now even if… they will be implemented after the end of the program,” Bank of Greece Governor Yannis Stournaras told Bloomberg TV on Friday. “Market clarity and transparency implies that we’d be better off if the measures are specified now.”
Apart from paving the way for Greece to enter the European Central Bank’s quantitative easing program, allowing Athens to borrow at low rates and bring down yields on Greek bonds down, the detailing of medium-term debt relief measures would provide the country with the first clear run it has had since signing the first bailout agreement. It would push aside talk of Grexit, snap elections, possible flashpoints with the lenders and allow investors to view Greece a bit more like a juicy prospect than an economic carcass they can nibble bits and pieces from.
Clearly, there are many “ifs” along this road that could upset the chances of a convincing recovery, but there is, at least, a muchneeded positive target to aim for.
Meeting the growth target, or at least getting close to it, will be important not just so Greeks can begin to see some of the benefits of the sacrifices they have made during recent years but also because the rate at which GDP grows will also determine to a large extent whether Athens can meet its also-ambitious fiscal targets.
Greece’s primary surplus is seen reaching 2 percent of GDP next year, which is roughly 1.8 billion euros higher than this year – a significant amount for the size of the local economy.
An increase in economic output will be vital because the work to achieve this goal will be done largely on the revenue side of the budget. Net revenues are seen increasing by some 2.3 billion euros next year to reach a total of 50.3 billion, while primary expenditure is projected to drop by more than 1.4 billion euros to around 44 billion.
In fact, the 2017 budget contains a series of revenue interventions that are expected to yield nearly 2.5 billion euros. This includes an extra 716 million euros from income tax, 440 million from the excise tax on energy, almost 220 million from the increase in the value-added tax rate (effective from July 1 this year) and 142 million from raising the excise tax on tobacco products.
The magnitude of this extra effort on the fiscal front can be measured against the revenues from privatizations, which are also forecast to reach around 2.5 billion next year. It is clear that without strong growth, stemming from the lifting of uncertainty, it seems impossible for Greece to meet the challenging fiscal targets that have been set for next year.
Surprisingly, there have been some encouraging signs on the revenue front this year. Despite 2016 being another year of friction and doubt, coming on the back of a nightmare 2015, revenues (or better, Greek taxpayers) have managed to stay the course.
According to the budget execution data published by the Finance Ministry last week, revenues at the end of October reached 42.4 billion euros, up 9.5 percent on last year. This helped the budget primary surplus come in at 6.5 billion euros, almost 3 billion above the target.
Could it be that after the battering from the economic tempest of the last year, Greek national budgets are actually becoming a reliable plan of action rather than a set of loose recommendations destined for irrelevance? Next year will provide the definitive test.
The 2017 budget sees the recovery being driven partly by a rebound in private consumption, which is expected to increase by 1.8 percent.