Landmark state budget in balance

The final budget of Greece’s so-called memorandum era has been submitted to Parliament and will be voted on before Christmas. The stronger growth and higher primary surplus it envisages are signs of the distance the country has traveled over the last seven years. Understandably, though, doubts persist about whether these forecasts will be achievable or whether they represent the wishful thinking of a government hoping it will be the one at the helm when Greece exits its eight-year stretch under international bailouts.

The basic elements of the 2018 budget are as follows: Growth is seen reaching 2.5 percent, unemployment is expected to fall to 20.2 percent, gross domestic product is due to climb to 184.69 billion euros, the primary surplus is expected to reach 3.82 percent of GDP, or 7.05 billion euros, privatization proceeds are seen rising to 2.74 billion and public debt is forecast to edge up to 342 billion euros.

The two aspects that immediately catch the eye are next year’s high growth rate and the large primary surplus.

A growth rate of 2.5 percent would be the highest Greece has seen in more than a decade. The last year of strong growth was in 2007, when GDP increased by 3.3 percent. The projected primary surplus is even more impressive given that the highest figure last achieved by Greece was in 2000, when the country was preparing to join the euro and it reached 2.7 percent. Even this year, when the government is in a position to redistribute 1.4 billion euros from the excess primary surplus, the figure is not expected to exceed 2.4 percent of GDP.

If Greece’s macroeconomic figures could be distilled to just two numbers, these are the ones that people would probably plump for. The growth rate is regarded as the barometer of whether Greece is climbing out of its economic crater, while the primary surplus is a yardstick for measuring if public spending and revenues are in line with what Athens has agreed with its creditors.

However, even behind just these two indicators there are numerous factors that have to be taken into account and many other numbers that tell their own stories.

If we look at 2017, for example, the economy is expected to grow by 1.6 percent and the primary surplus is seen reaching 2.4 percent of GDP. Taken in isolation, both figures could be regarded as being at least satisfactory. Growth has reappeared for the first time this year since 2014, when it was weaker, and the primary surplus target of 1.75 percent of GDP has been beaten comfortably.

However, other factors need to be considered. On the growth front, it is worth rewinding to this time last year, when the 2017 budget forecast that the economy would grow by 2.7 percent this year. It is a prediction that was subsequently revised downward at various stages last year, when the impact of the prolonged negotiations to conclude the third review became clear.

A closer look at the key growth-related data shows how Greece ended up at 1.6 percent for this year, rather than the 2.7 percent expected 12 months ago. At the time, the Finance Ministry expected private consumption to climb by 1.8 percent, investment to shoot up by 9.1 percent and exports to grow by 5.3 percent, compared to a slower rise of 3.2 percent for imports.

In fact, private consumption only grew by 0.9 percent and investment was also more subdued than expected, rising by just 5.1 percent. Exports performed better than expected as they climbed by 6.9 percent, but they did not outpace imports by the margin that was expected. Imports grew by 6 percent.

This is worth bearing in mind when one looks at the government’s forecasts for next year and how it expects the economy to grow by 2.5 percent. Private consumption is seen rising by a fairly modest 1.2 percent in 2018, but somewhat of a boom is expected in investments, which are anticipated to skyrocket by 11.4 percent. Exports are seen growing by 4.6 percent and imports by 3.8 percent.

It should be noted at this point that the Finance Ministry expects to secure 2.74 billion euros next year from completed privatization projects, one of the key sources of investment in Greece. This is an increase of more than 1 billion euros compared to 2017. There are 14 projects lined up for next year, including the sale of a stake in the Thessaloniki Port Authority (OLTH), Hellenic Petroleum (ELPE), the Public Gas Corporation (DEPA) and the natural gas transmission network operator (DESFA). Given the complications Greece has encountered in the past with its privatization program, it is understandable that some people are wondering whether all these major schemes will go ahead as planned.

There are also doubts on the fiscal front, where the government expects to be in the position at the end of the year to hand out a so-called social dividend again, albeit a smaller one. If the forecast of a primary surplus of 3.82 percent, or 7.05 billion euros, is met, it would leave a cushion of 587 million against the target of 3.5 percent.

It seems a little incongruous that this higher primary surplus is being predicted while the Finance Ministry is revising downward its expectations for revenue collection in 2018. Net revenues are seen at 50.51 billion euros from 51.27 billion in the Medium-Term Fiscal Strategy (MTFS), with both direct and indirect tax intakes lower than initially thought. This year’s missed revenue targets, which are widely considered a result of overtaxation, have already shown the difficulty of matching these forecasts.

It appears that the greater adjustment next year will come on the expenditure side, where total spending is slated to reach 48.44 billion euros compared to 50.52 billion this year.

Social spending will be the biggest victim of cuts, with roughly 1.6 billion euros being lopped off this year’s total for this category. Operating expenses are also due to be reduced to 5.33 billion from 6.17 billion in 2017, while interest payments will drop from 6 billion this year to 5.2 billion euros in 2018.

Greece is set to boldly go next year where it has not been for a long time. But a look at the data embedded in next year’s budget shows how many things have to come together for the forecasts it contains to be achieved. Being cautiously optimistic is probably the wisest choice.