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Next finance minister facing gauntlet

THANOS TSIROS

TAGS: Analysis

As Athens digests the results of Sunday’s general election, eurozone finance ministers will have Greece as one of the main courses at Monday afternoon’s Eurogroup in Brussels. This had already been decided last month, as today’s meeting intends to send a message to the new government, even if it is struggling to wake up from a night of celebrations.

Greece’s eurozone peers know there will likely be no Greek minister at Monday’s Eurogroup. Yet regardless of whether it is a minister or the Greek ambassador who represents the country, what matters to the eurozone ministers is that the the new government in Athens starts the process of examining new proposals ahead of negotiations scheduled to take place in September.

This makes sense, since what is at issue is not just the fiscal gap, which eurozone ministers expect to amount to 1 percent of the gross domestic product this year after the measures outgoing prime minister Alexis Tsipras introduced in May. There is also the question of 22 reforms which the outgoing administration failed to push through, resulting in a negative review during the third assessment. If the new government wants to reverse this picture and secure the second tranche from eurozone central banks’ earnings from Greek bonds (the SMPs and ANFAs) by the end of the year, it will have to roll up its sleeves and get to work today.

With zero time to adjust, the new finance minister will have to dive right into the deep end. The first dossier on his desk, marked “Urgent,” will contain the 2020 draft budget, as the target of 3.5 percent of gross domestic product appears increasingly elusive for this year. It is disputed both domestically and abroad, with the Bank of Greece expecting a primary surplus of 2.9 percent and the European Commission of just 2.5 percent.

The drafting process for next year’s budget will require express procedures as it will have to be ready by early September, before the new prime minister’s speech at the opening of the Thessaloniki International Fair. Straight after, negotiations with the representatives of the country’s creditors will begin for the fourth post-bailout assessment.

The months up to early September will be crucial: They will show the effects of the value-added tax rate reductions, the declared incomes of taxpayers in this year’s statements – which in the last four years have been in constant decline, mainly due to an increase in tax evasion – as well as the effects from the introduction of the tax debt payment settlement in up to 120 tranches.

After the decision to expand the 120-installment program to businesses with annual revenues of up to 2 million euros, the fiscal impact is anticipated to be even greater. For now, the payment plan has only fetched revenues of 105 million euros, while around one in every two out of the approximately 155,000 participants have paid their dues in a lump sum, so as to secure a complete writeoff of penalties.

On a practical level, the new administration at the Finance Ministry will have limited scope for maneuvering on the revenues side, as the only measure that has not yet been activated is the planned reduction of the Single Property Tax (ENFIA), by 10 percent on average. Therefore, if there are any shortfalls in the execution of the state budget, the onus will be on the side of public expenditure.

For the time being, it appears that the budget’s balance will not require the additional 150 million euros for subsidizing borrowers who will enter the home protection plan. Given that this online platform opened late last month, it will take at least two months for the first agreements between banks and borrowers to be reached. Therefore, the state will start being burdened with the subsidized tranches stemming from the protection plan (between 20 and 50 percent) after September and for just three months in this year.

The execution of the budget after the crucial second half of the year begins without a safety cushion for the new Finance Ministry’s administration. The official budget figures for June will be published later this month and if information is verified about a reduction of revenues over 10 percent last month – with a simultaneous jump of spending above the target for the month before the elections – there will be no such thing as an excessive surplus any longer.

In the first five months of the year, the state budget performed better by 2.36 billion euros, recording a primary surplus of 916 million euros against an original projection for a primary deficit of 1.447 billion euros. However, this overrun is not recognized as such according to the agreement with creditors as it stems from the following sources:

- The 1.119 billion euros received from the extension of the concession contract for Athens International Airport (AIA). This money does not count toward the primary surplus as calculated by the bailout agreements.

- The tax revenues also include 271 million euros from the value-added tax corresponding to the AIA extension deal. This concerned one-off revenues that are also excluded by the creditors from the primary surplus.

- The revenues also include the takings from ANFAs, amounting to 644 million euros collected in May. The ANFAs are not taken into account for the primary surplus according to the bailout programs.

After deducting the above, the actual excess of the primary budget surplus drops to just 300-350 million euros. If information about a shortfall in June is confirmed, then the budget will effectively enter the second half of the year on balance. However, the latter part of the year is burdened by the collection of 60-63 percent of the annual tax revenues, as well as the assessment of the effects of the repayment program for overdue arrears to tax authorities and social security funds.

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