OECD sees robust growth, but warns of inflation risks

Think tank calls for tighter fiscal policy, controlled spending

By Foo Yun Chee - Kathimerini English Edition

Greece is expected to outperform other member states of the Organization for Economic Cooperation and Development (OECD) within the next two years, the Paris-based think tank predicted yesterday, putting it on track to achieve real convergence with the eurozone. However, the organization tempered its praise with calls for more action to dampen inflationary pressures and bring down public debt.

Greece’s gross domestic product is likely to grow by 3.5 percent this year, the organization said, echoing a similar estimate from the Bank of Greece. The government, on the other hand, has stuck to its 3.8-percent forecast, even going so far as to suggest that national output this year could exceed this figure.

The inflow of community structural funds, ongoing infrastructure works related to the 2004 Olympic Games, and strong consumer spending are expected to help boost Greek GDP growth in the next two years, the OECD said in its midyear country review. Output growth is also due to benefit from low interest rates and this year’s package of tax cuts.

Strong growth, however, has its risks, the organization said, citing Greece’s higher-than-average inflation as one of them. Greek annual inflation in May came in at 3.8 percent, against an estimated 2 percent in the eurozone.

The gap is likely to remain, the report warned, with Greek inflation expected to be “markedly higher than the eurozone average, with risks on the upside,” due in part to higher labor costs in the public sector.

The OECD also questioned the government’s goal of a 0.8-percent budget surplus set for this year, saying that limited success in controlling spending could lead to a surplus of just 0.5 percent of GDP. It suggested that a tighter fiscal policy would be more productive in controlling inflation and reducing public debt while a larger budget surplus would help alleviate some of the pressures connected to future pension expenditure.

The organization urged the government to curtail its off-budget debt transactions, a strategy much favored by the State in recent years as it has sought to raise funds to reduce public debt without weakening its commitment to the stability and growth pact. Such tactics could jeopardize Greece’s medium-term debt target and would require significantly higher primary surpluses in the future, the OECD said. It said a more powerful tool in cutting debt would be to control public spending and improve its effectiveness. Greece plans to reduce public debt to 60 percent of GDP by the end of the decade.

Regarding current tax reform efforts, the organization said the proposals go in the right direction toward making the tax structure simpler and fairer. The government is due to unveil its proposals next month, with parliamentary debate planned for the fall. The changes are due to come into effect next year.