Government will have to forgo some promises
The new Greek coalition government is not off to a great start but it does have to be given some time to formulate policy and leave its own footprint. However, one thing is certain. It has to backtrack from some of the points of the policy program announced by the leaders of the three parties backing the new government if it is to keep the country in the eurozone.
Antonis Samaras, the new prime minister, may have struck a chord with the average citizen by cutting ministers? salaries by 30 percent but he did not succeed in doing so with the market and entrepreneurs. The 39-member government — partly the product of compromises between New Democracy, PASOK and the Democratic Left party — is generally viewed as being too big. Moreover, many market players think it lacks a sufficient number of true technocrats and reformers in key ministries. This contrasts with pre-election statements by Samaras who favored a small government made up mostly of technocrats. Perhaps, the inability of the conservatives to secure a majority in parliament changed his plans, but still, some choices appear to be more a reward for party loyalty than anything else.
Nevertheless, the new government could do the job and improve public finances at the same time as pushing for the implementation of structural reforms. Given the competence level of the civil service — a byproduct of the jobs-for-vote exchange in Greek politics — and sometimes the lack of political will, no realist would have expected fast and major progress in reforms. The latter are necessary for unlocking the potential of the local economy and boosting international competitiveness but usually bear fruit in the medium-to-long run. So, they cannot be of much help at present when the main goal should be to stabilize the economy and ease the pain at the same time as fiscal consolidation continues.
There are some positive signs so far. Despite heightened political uncertainty and delays due to two national elections, the data from the state budget in the first five months of the year are encouraging. The primary deficit of the state budget, which excludes interest expenses on public debt, narrowed to 2.35 billion euros compared to the target of 4.25 billion euros and 4.57 billion in the same period a year ago.
It is noted that the state budget is the biggest chunk of the general government budget which the EU and the IMF use to assess fiscal performance and accounts for almost all of the general government budget deficit. Many have pointed out that the contraction of the primary deficit is mainly due to the state?s policy of delaying tax refunds, building more domestic arrears by not paying its suppliers and others in the private sector on time.
Although this is true, the amount is easily surpassed by expected revenues from income taxes and a host of real estate taxes delayed for political reasons, namely to increase the chances of the pro-euro parties to win the elections. Just to give an example, the new real estate levy collected via the electricity bills alone exceeds 2 billion euros. If the state had collected 40 percent of the 2-2.5 billion for the January-May period, state budget revenues would have been higher by 800 million euros in addition to the 630 million increase recorded despite the continued steep drop of the GDP. This is in addition to other real estate taxes from previous years.
So, we think that the new government has a good chance of broadly meeting this year?s budget targets despite the economic slump and protracted period of political uncertainty, assuming the deficits of the social security funds do not get out of hand. Moreover, we think the government has a good chance of producing a smaller primary deficit in 2012 if it aligns payments in the civil service and the greater public sector with the private sector in December. We are talking about 1 billion euros plus in savings in primary expenditure for fiscal 2012, which is equal to half the projected primary deficit.
But, the coalition government will have to forgo some commitments to reduce taxes and increase benefits for certain socially vulnerable groups this year by pushing them further into the future, that is, 2013 and beyond. It also has to accept that the number of employees in the public sector will have to be reduced by 150,000 in the next few years and accept cuts in the wage bill of privileged professions in the public sector, such as priests, which have been spared such cuts unlike the majority of their colleagues elsewhere this year. To save face, it may resist pay cuts in some very small groups such as air force pilots and special police units.
It is essential that negotiations with the troika about updating the economic adjustment program and overhauling the means of attaining the fiscal targets in a more extended time framework be done smoothly so as not to fan concerns in the market and the Greek public about the country?s place in the eurozone.
This does not mean the government will have to back down on certain areas such as the introduction of growth conditionality in the MoU (Memorandum of Understanding) to make sure funding is secured and that deadlines for important projects are binding. It will also have to demand that the projected spending cuts of 11.5 billion euros be spread out through 2016 to give breathing space to the economy, accompanied by a relaxation of fiscal deficit targets with extra financing coming from domestic sources.
Undoubtedly, the Samaras government has a tough job to do. This is made harder by economic reality, the pressure applied by international creditors, the expectations fanned by some politicians about doing away with austerity measures altogether and the main opposition left-wing SYRIZA party. At best, this government has two years at its disposal until the elections for European Parliament in June 2014 to prove it is more effective than some now think and keep the country in the eurozone. We have to wait but the goal may not be met if resolve is not accompanied by realism and the three coalition partners do not backtrack from some of points of their general agreement framework.
