Restricted spending options
Ministry of Finance officials call them “the elephants in the room.” They refer to defense and pensions, where increased spending needs severely restrict the margin of maneuver for spending on other items.
The European Commission is strict: Spending increases have limits. And, in Greece’s case they cannot exceed 3-3.2% annually. This is not an arbitrary limit; it is compatible with the government’s own plan to achieve primary budget surpluses – excluding servicing the country’s debt – equal to 2.1% of GDP in both 2024 and 2025. This is part of the Stability Pact goals submitted by the government in April and are prerequisites for reducing the debt as a percentage of GDP by 1 point, as the Commission demands of countries whose debt exceeds 60% of GDP. And Greece is way above the limit: At the end of the year’s first quarter, debt stood at 159.8% of GDP, having declined from an all-time high of 210.3% in March 2021.
Greece’s embarking on an ambitious defense procurement program, which includes brand-new frigates and, later in the decade, the advanced, multimission F-35 aircraft, means an extra €1 billion in spending in 2025, which could rise to €2 billion in subsequent years.
Extra spending on pensions in 2025 will also rise to €1 billion, fueled by an increased number of retirees. Finance Ministry officials say that the number of retirees, which fluctuated between 100,000 and 150,000 annually, is now between 200,000 and 220,000. Legislation that allows retirees to continue to work without facing punitive tax rates is partly responsible.
The spending increase limit allows Greece to spend an additional €3 billion each year. For 2025, besides the extra €2 billion that will go toward defense and pensions, the government has to make good on its commitments to reduce social security contributions (a revenue loss of €215 million), abolish the professional activity fee (€120 million), reimburse farmers for the special consumption tax (€100 million), suspend VAT on construction (€20 million) and raise the housing subsidy for university students (€15 million).
Finance Minister Kostis Hatzidakis has declared right and left that he will not endanger fiscal stability. “If we have to spend somewhere, we must cut from somewhere else,” he says.
