Difficulties of budgeting for the future

After many growth-starved years in Greece, it is perhaps natural that the first thing people focus on when the government submits its national draft budget to Parliament is what it suggests about the prospects of gross domestic product increasing. While this part of the ruling coalition’s economic plan for 2018 is undoubtedly significant, there are other aspects of the budget that could end up being more important.

The draft budget estimates that GDP will grow by 1.8 percent in 2017. This is a slight improvement on the figure in the Medium Term Fiscal Strategy (MTFS) and is driven by 1.1 percent growth in private consumption and a 1 percent rise in public consumption.

Growth in 2018 is seen at 2.4 percent. The Finance Ministry expects it to be fuelled by a 1.4 percent rebound in private consumption and an acceleration in investments of 12.6 percent. Exports are estimated to continue growing by 4.7 percent. This would lead to the anticipated import rise of 4.4 percent being exceeded.

Should these figures materialize, it would mean that the long-expected and much-debated recovery would be under way finally. But there is substantial ground to cover before we get to this point.

The key to the successful execution of the next financial year’s budget will probably be found on the fiscal side. According to the preliminary figures unveiled by the government last week, the primary budget surplus is set to reach 2.21 percent of GDP in 2017, beating the 1.75 percent target by 823 million euros. The primary surplus is expected to reach 3.57 percent of GDP in 2018 (equivalent to a staggering 6.7 billion euros), just above the program target of 3.5 percent.

Despite the assurances that the 2017 and 2018 targets will be beaten, the draft budget’s revenue figures highlight how tough a task this will be and the sizable degree of uncertainty as to whether the government will be able to deliver.

There has been much debate in Greece over the last months about whether repeated tax increases have squeezed the economy dry. The calculations in the draft budget suggest that there are clear signs of fatigue among taxpayers.

For instance, the Finance Ministry had to revise downward by more than 500 million euros the state revenue target for 2017 compared to the figure included in the MTFS, which was only submitted in mid-May 2017. The target is now reset at 52.22 billion euros, which is lower than the 2016 figure of 52.34 billion, despite the fact that the economy has started growing this year.

The total revenue figure for 2018 has also been lowered from 52.94 billion euros to 52.49 billion euros in the draft budget. The ministry admits that the main cause of this shortfall is the poorer-than-expected performance of direct taxation, particularly that involving individuals, which is seen totalling 20.37 billion in 2017 from an MTFS estimate of 21.52 billion euros.

Direct taxes estimates for 2018 have also been revised downward from the May MTFS figure of 21.45 billion euros to 20.78 billion. This is a warning sign regarding the ability of Greeks to continue shouldering their heavy tax burden as no tax cuts are in sight. In fact, 12 new fiscal interventions are due to be implemented next year, adding to the pressure on companies and individual taxpayers.

The draft budget also outlines the Greek government’s strategy for debt management next year and in the period after the end of the bailout program, which is due in August 2018. The government believes it can make a so-called “clean” exit from the bailout, which means that it will not need its eurozone creditors to provide it with a credit line and Athens, in return, will not have to comply with any further conditionality.

There are still many who doubt that a clean exit is possible, but the Finance Ministry sets out how it hopes to achieve it: It will base its efforts on bond market access, the build-up of cash reserves in state coffers and the medium-term debt relief measures that were reaffirmed by the eurozone over the summer.

The draft budget indicates that the government will tap the markets again to build its cash reserves, as the volume of bonds included in the public debt for 2018 is seen at the higher level of 5.1 billion euros.

The Greek government intends to swap some of the bonds that were exchanged as part of the Private Sector Initiative (PSI) debt restructuring in 2012. These consist of a series of bonds whose repayment is due to begin in 2023.

The combination of the medium-term debt relief measures is another pillar to the debt management strategy. The government anticipates savings in debt servicing from the drop in step-up charges from the 2012 debt buy-back as well as the capping of total debt servicing at 15 percent of gross domestic product in the medium-term and 20 percent in the long-term.

The final element to the post-program strategy is the June 15 Eurogroup decision, which the Greek government considers an implicit guarantee that the eurozone member-states will facilitate Greece’s return to the market by disbursing tranches for the build-up of reserves to create a safety net.

However, it should be noted that the statement issued by eurozone finance ministers in the summer is probably vaguer than Athens would like.

“In view of the ending of the current program in August 2018, the Eurogroup commits to provide support for Greece’s return to the market: the Eurogroup agrees that future disbursements should cater not only for the need to clear arrears but also to further build up cash buffers to support investors’ confidence and facilitate market access,” it concludes, without identifying a particular figure.

Furthermore, disbursements of funds by Greece’s creditors since the first bailout program was agreed in May 2010 have always been accompanied by strict conditionality and related to specific debt obligations on the Greek government’s part. The concept of the European Stability Mechanism (ESM) releasing money that will only be set aside by Athens and will not be tied to specific prior actions is one that has yet to be put to the test. It is quite likely that the process will prove more complicated – just as executing budgets is never as straightforward as it seems.