Budget’s tough balancing act

The 2022 budget that cleared Parliament on December 18 already appears hard to implement in full. The year will start amid extensive uncertainty due to the twin Covid-19 and soaring energy cost crises, which could undermine the effort for strong growth and the expressed desire for a drastic reduction in the primary deficit so the country can return to a primary surplus as of 2023.

The soaring natural gas rates are a huge threat to the GDP, as they are considerably raising costs for Greek exporters and multiplying the chances of a general inflation wave due to the passing of energy hikes onto most other commodities. The Bank of Greece already expects the average inflation rate to jump to 3% for 2022 as a whole, from just 0.6% in 2021.

Furthermore, the Omicron variant of the coronavirus has seen a revival of discussions over additional restrictions as of January. These measures are expected to affect sectors such as entertainment, sports and culture, which in turn will put in doubt the ending of the support measures and the recovery from the huge primary deficits of 2020 and 2021.

The energy crisis may also have a major fiscal effect: While state coffers enjoy increased value-added tax inflows and takings from the energy charges, it will be a tough task to keep supporting household bill subsidies for a long time using only the resources from the Energy Transition Fund: The state budget will likely have to be used for that too.

The electricity hike subsidies – which have already increased three times since September – only cover part of the extra costs households face and do not cover corporations now that they are massively increased bills.

The new year will have very ambitious targets, as well as uncertainties: The government hopes to emerge from the post-bailout enhanced surveillance, secure sensible primary surplus targets for the years starting in 2023 through the new European Union Stability Pact, and bring closer – if not achieve – an investment grade credit rating.