Greece’s 2003 final budget draft, submitted in the Greek Parliament last week, may have contained no surprises, but it clearly showed it will take a long time before Greece’s huge public debt-to-GDP ratio is brought down to levels compatible with the 60-percent level cited in the EU’s Stability and Growth Pact. This approach to public finances entails risks that may prove insurmountable in the future. The Greek General Government budget deficit is projected to ease to 0.9 percent of GDP next year from a revised deficit of 1.1 percent of GDP this year and 1.2 percent in 2001. The figures mainly reflect Eurostat’s demand that subsidies to public organizations, known as capital transfers, be reclassified as budget expenditure. The adjustments affected the 2000-2002 fiscal accounts, which portrayed a far rosier picture as evidenced in forecasts for a budget surplus equal to 0.4 percent of GDP this year and a smaller surplus of 0.1 percent of GDP in 2001. Greece’s 2003 budget is admittedly based on a more realistic assumption of GDP growth standing at 3.8 percent versus 4.1 percent in an earlier budget draft. Moreover, it projects a General Government budget deficit as a percentage of GDP which is smaller than in other EU countries, and this should be viewed as a positive development. Nevertheless, the budget fails to pass the litmus test of fiscal discipline required from a country which is plagued by a high debt-to-GDP ratio. Instead, it appears that the 2003 budget is rather expansionary, perhaps a welcome development for a country facing a significant economic slowdown. However, Greek GDP growth exceeds the potential GDP growth rate, put between 2.5 and 3.2 percent, fanning inflationary pressures and keeping Greek inflation at high levels, undermining the Greek economy’s international competitiveness. Economists, such as EFG Eurobank’s Platon Monokroussos, essentially hinted at the 2003 budget’s expansionary bias. «Regarding the thrust of the fiscal policy for next year, we would hardly characterize it as restrictive,» said Monokroussos. He also pointed out that the Central Government’s primary expenditure was projected to stay broadly unchanged at 25.9 percent of GDP in 2003 vs 25.8 percent in 2002, and warned that even this estimate could prove optimistic given the government’s poor record in meeting expenditure targets and likely fiscal slippage ahead of national elections in 2004. OECD also estimates that the cyclically adjusted General Government budget deficit stands at 1.3 percent of GDP in 2002 and 2003 – that is, higher than the official one – implying some fiscal slippage when the budget’s expenditure and revenue items are adjusted to take account of the country’s projected high economic growth rates. This, in turn, reinforces concerns about future Greek fiscal balances since the economy cannot keep on growing forever. Alpha Bank’s economists also hinted that fiscal policy was not tight enough and pointed to the Central Government budget deficit, viewed by some as a better barometer of fiscal policy, projected at 3.5 percent of GDP next year, unchanged from this year. The Central Government budget, which includes the Ordinary Budget, the Public Investment Program and the balances of local authorities, public utilities and some other entities, comprise the General Government budget. Alpha’s economists stressed that whatever improvement in Greece’s fiscal accounts continued to come from lower interest costs and a satisfactory rise in tax revenues while primary expenditure continued to overshoot budget targets. However, the clearest expression of inadequate fiscal tightening came from the Central Government’s primary budget surplus, an indispensable tool for public debt reduction. The latter is projected at 2.7 percent of GDP in 2003 compared to an estimated 3.1 percent of GDP in 2002. OECD estimates that Greece will have to run annual primary surpluses equal to 5.0 percent of GDP or larger if it wants to reduce its debt ratio to around 60 percent of GDP by 2010, assuming no debt-generating factors. Government officials point out that Greece’s public debt-to-GDP ratio is projected to drop to 100.2 percent of GDP in 2003 from 105.3 percent in 2002 and a revised 107 percent in 2001, the result of Eurostat’s decision to include proceeds from securitization of expected future revenues, convertible bonds and privatization certificates in the General Government public debt. Still, the nominal debt is expected to fall faster in the next couple of years because a good deal of privatization certificates are expected to be converted into shares of listed companies. If it were not for this, the underlying improvement would have been less impressive. Assuming a rise in euro interest rates from 2004 onward and slower economic growth past 2005-06, Greece may not have enough time left to lower its debt ratio without incurring a painful, debt-induced economic adjustment.