It is not the first time our fiscal policy will go awry. But, a careful look at the 2003 draft budget now being debated in Parliament shows that this is almost a certainty. The policy choices of Economy and Finance Minister Nikos Christodoulakis are at complete odds with what he has been preaching lately, as the presiding officer of the eurozone finance ministers group, on the principles of fiscal policy. The figures that show a higher-than-expected debt and a budget deficit instead of a surplus are not simply the result of intervention by Eurostat, which obliged the government to make its accounts more truthful. Nor will worse figures in the future be simply the result of further Eurostat intervention or the revelation by the State Accounts Office of public accounts illegalities. Officials may deny it, but we are witnessing an about-turn in fiscal policy. With the partial implementation of the tax reform, the government’s revenue policy became more lax. The decision to keep the social security system afloat with injections from the budget and a series of new subsidies further burdened expenditure. Given the fact that estimates of spending on wages are regularly overshot, it is fair to say that Mr Christodoulakis is changing the thrust of fiscal policy. In so doing, he is doing the opposite of what the European Commission demanded on Wednesday. The EU’s finance commissioner, Pedro Solbes, said, «The countries with debt levels significantly exceeding the target figure of 60 percent of their GDP must devise ambitious long-term policies to reduce their debt as part of their Stability and Growth policies.» It is obvious that Greece, with a debt now estimated at 118 percent of its domestic product, even after the government’s provisions to reduce it to 114 percent in 2003, is very far from the targets it committed itself to attaining. Indeed, in 2001, it had said that by 2003 the debt would be equal to 90.5 percent of GDP. That, of course, was before the combined interventions of Eurostat and the State Accounting Office revealed the real extent of the debt. These extra 13.5 percentage points in the end-2003 figure are the equivalent of four years of hard efforts to reduce the debt. That’s the extent of the setback to the efforts. Mr Christodoulakis’s choice is doubly dangerous. He is following a more lax fiscal policy at a time when the European Central Bank’s single monetary policy is too lax for Greece’s economy, with its higher-than-average growth and inflation rates. With the annual inflation rate stuck at levels above 3 percent and a strong likelihood of the reduction in the euro’s main intervention rate to 3 percent, this will create further inflationary pressure. The finance minister’s laxity will hurt wage-earners’ incomes, the competitiveness of enterprises whose exports are already at very low levels and will lead to rising unemployment in the medium-to-long term. It may help the public sector by increasing its revenues, and it will also help banks and enterprises whose survival depends on a continued high level of consumer demand. In the 2003 budget, expenditure on civil servants and public companies is 15 percent higher than that of 2001. As for spending on the repayment of the principal of loans, this will have increased 57.5 percent over two years. This final figure alone ought to have been enough to bring the minister back to his senses. He is the one, after all, who, in presenting the 2002 budget, called on state ministries and agencies to respect the need for long-term austerity in their finances, in order to «strengthen, and make permanent, a climate of fiscal discipline.» He had correctly pointed out that agencies, «should not transfer spending to subsequent years,» and added that in cases of spending overruns, spending items would have to be canceled and budgets readjusted to reflect the existing resources. No serious observer predicts that the government will contain the increase in expenditure within the 5.6 percent target. Neither do they believe that the State’s operational spending will decline 1.2 percent. But these are the minimum results required to contain primary spending increase to 6 percent. Even this high level – it exceeds the inflation rate, after all – is hard to adhere to: For example, subsidies toward the Social Security Foundation will increase 19 percent. It follows that the government will fail to deliver on its promise of a primary surplus equal to 2.8 percent of GDP. In 2000, this primary surplus was equal to 4 percent. This slackening of fiscal policy is opening deep wounds. A crisis may erupt later, or sooner, if the growth rate also slackens, as the Bank of Greece has predicted.