The uphill battle of surpluses

Bank of Greece Governor Yannis Stournaras has put the bar for next year’s primary budget surplus – that is, excluding debt servicing – at 2.3% of the country’s gross domestic product (GDP). This is the minimum he deems necessary for the debt, as a percentage of GDP, to keep falling and for the country to return for good to the path of fiscal rectitude.

Government estimates, as part of the Stability Program submitted to the European Commission in April, are not that different: the program sets a primary surplus target of 2.1% in 2024, 2.3% in 2025 and 2.5% in 2026. But even the lower 2024 number means that the surplus must double or triple from 2023, when it is expected to end up at between 0.7% and 1% of GDP.

Finance Ministry officials, besides dousing expectations of handouts, note that tax cuts are also coming to an end. The new priorities are boosting pro-growth policies and deep reforms in education, health and public administration.

The latest, and final, we are told legislation giving civil servants a pay rise, parents bigger tax breaks and making good on other pre-election promises will cost about €4.4 billion over the conservative government’s second four-year term.

A debt sustainability analysis published by the European Commission last May calls for minimum surpluses of 2.1% so that the debt – seen reaching 162.6% of GDP in 2023 – can drop to 126.1% in 2033. The Bank of Greece believes a 2.3% surplus in 2024 (on a non-cyclically-adjusted basis, since a production gap no longer exists and demand exceeds Greece’s production capacity) is necessary.

Stournaras also keeps warning that the expected upgrade of Greek debt to investment grade should not lead to a relaxation of fiscal policy, a mistake successive governments have repeated after reaching some milestone.

From 2024, the Commission, besides the primary budget surplus, will also monitor closely net primary expenditure, whose growth in Greece cannot exceed 2.6%, or about €2.5 billion.

A senior Finance Ministry official expresses his optimism the government can contain spending and achieve the debt reduction goals: “The idea is to have a fiscal balance…no new handouts and no new taxes,” he says.