ECONOMY

War tests economy’s stamina

Hikes in energy costs, food prices and raw material rates are threatening the state budget

War tests economy’s stamina

The Russian invasion of Ukraine has reversed the financial landscape in Greece and violently interrupted the return of the Greek economy to normality after the pandemic.

New hikes are expected in the already high energy rates, as well as in the prices of food and raw materials, and any hopes of their containment have now vanished for the next few months, thereby testing the stamina of households, corporations and the state budget.

It is impossible to make any safe predictions at this stage, given the fluidity of the situation, but it can be taken for granted that the high inflation will have a negative effect on growth, make reducing the deficit to the level the budget provides for more difficult, as the new rates rise, mainly in energy, and lead to an extension of state subsidies.

Although energy was not included in the sanctions slapped on Russia last Thursday, leading to a decline in oil rates on Friday, the problems facing the economy and the national budget are inevitable.

Finance Ministry officials said that what concerned them last week was the continuation and possible increase of power bill subsidies, and the support of vulnerable households, “if there is any fiscal space.”

These targets will be hard to meet, given that the budget was already at its limits before the outbreak of war in Eastern Europe, hence the withdrawal of scenarios about a cut to value-added tax and fuel consumption tax rates. Now needs are growing further and there are two main solutions: Either raise the primary deficit from 1.4% of gross domestic product that the budget provides for, or have the European Union intervene and support households through resources of its own.

The government is further considering targeted measures for companies hurt by the soaring energy costs. Kathimerini understands that the Finance Ministry and the tax authorities are already preparing the necessary mechanisms for the support of businesses, with subsidies differing according to sector.