Hard transition awaits after summer
The brief summer break for Greece’s politicians, truncated by the terrible wildfires that scarred various parts of the country, is coming to an end. Ministers will soon be returning to their desks to tackle the large pile of paperwork that awaits in their in-trays.
By the end of next month, the government must complete 66 prior actions. By the end of the year, 95 of these key deliverables will have to be wrapped up if the commitments made to Greece’s lenders are to be fulfilled.
There is no denying that this is a tall order, especially if the government is to achieve its goal of completing the upcoming review, the third of Greece’s third program, as quickly as possible so that it will be in a position to conduct another bond issue in the months ahead.
The prior actions include a range of interventions in the public administration and on the privatizations front, product market reforms and adjustments to social benefits.
On top of that, the government has to use up 800 million euros from the last bailout tranche it received to reduce state arrears, which stood at 5.1 billion euros at the end of June. Athens has to add another 400 million euros of its own funds to this so that arrears are reduced by a total of 1.2 billion euros. Without this reduction, Greece will not be able to claim another 800 million euros that the European Stability Mechanism is set to disburse for the further payment of arrears.
Limited progress has been made since the last review was completed on June 15 and a great deal of work lies ahead for the coalition. The history of program reviews since 2010 is littered with Greek governments expressing their best intentions and promising swift action but rarely being able to live up to such ambitions. So Athens will really have to pull out all the stops this autumn for the assessment by the institutions be completed on time.
This race against the clock is only part of the story that we will be following in what is left of 2017. The other nail-biter is whether the economy meets, or even exceeds, expectations and, consequently, whether the budget will be on track.
Greece has to achieve a primary surplus target of 1.75 percent of GDP, or more than 3 billion euros, this year. Preliminary budget execution data published last Monday indicated that on the face of it, Athens is on track to achieve this target. The budget primary balance at the end of July was 3.05 billion euros, which was 12.4 percent higher than during the same seven-month period last year. It was also 955 million euros above the end-July target.
However, the figures published by the Finance Ministry show that this was exclusively achieved through reduced spending as revenues were below their target. Net revenues for the first seven months of the year amounted to 26.2 billion, which was 656 million, or 2.4 percent, below the target. Primary expenditure, though, stood at 23.1 billion euros at the end of July, which was around 1 billion euros below the target. The ministry said that it had held back spending on hospitals, social security and family allowances, among other things.
This rang a few alarm bells as July was the month in which the first installment of extra income tax was due. Figures from the Independent Authority for Public Revenue suggest that around one in three of the taxpayers in question, or some 671,000 in total, failed to make this first payment, which led to a total of about 340 million euros not being paid.
Clearly, if this pattern continues in the following months, Finance Minister Euclid Tsakalotos will have a significant problem. The concern is that the tail end of the year is loaded with tax obligations and that Greek businesses and households are buckling under the financial pressure of so many years of escalating taxes without any notable growth.
In June, another 727 million euros in new overdue tax debts was added to the pile, taking the total for 2017 to 5.5 billion euros and the overall sum, including so-called legacy debt, to 95.6 billion euros, which is the equivalent of just over half of Greece’s annual GDP. Although there was a slight slowdown in the growth of unpaid taxes in the first half of this year compared to 2016, the numbers still show that for every 3 euros the government collects, another euro is added to the heap of debt that taxpayers owe to the state.
Income tax is just one of obligations that Greeks will have to meet in the autumn. Soon, payment of the ENFIA property tax will be due, while road tax for cars and motorcycles will also have to be paid by the end of the year. This adds up to more than 7 billion euros that taxpayers will have to hand over to the state before the year is out.
The budget foresees total revenues of 48.2 billion euros being collected by the end of December, which means there could be many sleepless nights ahead for Finance Ministry officials as they watch the numbers come in each month over the autumn.
One factor that could give them more peace of mind is the economy performing up to their expectations or even exceeding them. The Finance Ministry has forecast that Greece will have a growth rate of 1.8 percent this year. There was growth of 0.4 percent on a quarterly basis in the first three months of the year. The government will be hoping that the delay in concluding the program review, which was finally wrapped up at the end of the second quarter, did not hamper growth as much as was feared.
Finance Ministry sources suggested to the local media last week that the Q2 GDP figures, which are not due to be announced until the beginning of September after ELSTAT suspended the publication of flash estimates, could show growth of 0.8 percent, which would keep Greece on track for its full-year goal.
The transition from summer, usually a more carefree and relaxed time of year, to autumn, when obligations and routine take over, is never an easy one. For Greek authorities, this year’s switch will be as challenging as it has ever been.
Many things need to fall into place during the months ahead for Greece to be able to have any confidence it is heading for recovery and for the platform for next year’s expected program exit to be constructed.
