State spending needs more taming

Greece’s general government budget deficit will likely narrow further this year on biting austerity. However, fiscal consolidation will not be sustainable unless expenditures are reduced to lower levels and controlled while taxes are cut along with social security contributions.

The prospects for this kind of rebalancing are not bright given the propensity of the political elite to tax and spend and the lenders’ fixation with bringing in more revenues to close the budget hole and produce a sizable primary surplus. Sticking to the same course will likely lead to lower economic growth rates in the future as resources are transferred permanently from the private sector to the inefficient public sector.

We cited general government figures last week, showing that revenues jumped to about 45 percent of gross domestic product last year, despite the continued recession, from 38.3 percent of GDP in 2009 and 40 percent in 2005, when the economic pie was almost equal to last year’s 193.7 billion.

We also noted that estimated primary expenditures without some one-off items stood much higher at around 45-46 percent of GDP compared with 40 percent in 2005.

Fiscal consolidation has relied much more on increased revenues than spending cuts over the last few years.

This fiscal mix and the overdose of austerity, measured by the cyclically adjusted budget, explain the inefficiency of the country’s huge fiscal effort. It is noted it has taken restrictive measures accounting for over 30 percent of GDP to balance the primary budget this year from a record 10 percent of GDP in 2009.

The outcome would have been much better if successive governments had been willing and the troika had been more keen to overhaul the public sector from the early stages of the adjustment program. This would have likely resulted in some sizable savings to the budget since many redundant state entities would have closed down or merged with others and the number of employees in the general government would have been contained earlier on, allowing for a fairer distribution of wage cuts in the public sector.

Easier said than done

Of course, this is easier said than done in Greece since many politicians across the political spectrum tend to resist the streamlining of the public sector, where many of their relatives and voters work. Nevertheless, a look at the changes in general government spending between 2005 and 2012, when GDP at market prices was almost equal, highlights the areas of potential intervention. Indeed, three spending categories are singled out, namely salaries, social benefits and capital transfers payable.

We think the category of capital transfers should be taken out because it reflected one-off payments to recapitalize banks in 2012, bringing the total to 15 billion euros from 6.7 billion in 2011 and 8.4 billion in 2005. It looks that expenditures in this category should normalize again and come down considerably soon without much intervention by the authorities. Also, public sector salaries stood at 24.2 billion euros, or 12.5 percent of GDP, in 2012 from 22.4 billion, or 11.5 percent of GDP, in 2005. So, it was still higher by more than 2 billion euros compared to 2005 but one has to take into the account both the number of employees and inflation over this period. Nevertheless, spending could be reduced by 1-2 billion euros in the next couple of years if the streamlining of the public sector proceeds.

However, the big difference in primary spending is due to the social benefits category. Greece spent 44.4 billion euros, or 22.9 percent of GDP, last year compared to 31.8 billion or 16.5 percent of GDP in 2005, that is, more than 12 billion euros.

It is noted the country spent 22.5 billion, or 15.4 percent of its GDP, on social benefits in 2001, the year it was admitted to the eurozone.

This is a huge amount and could make the difference in producing a large primary surplus while reducing taxes.

Pensions blitz

Since the Greek population is aging, it is normal to expect a rise in expenditures for healthcare and pensions. On the other hand, one should note Greece has more than 2.7 million pensioners receiving more than 4.4 million pensions, according to official data, but the population aged 65 and over is a bit more than 2 million people. This is the result of rules favoring early retirement for groups like military personnel and mothers with three or more children. As far as public healthcare expenditure is concerned, this is another area which has been begging for intervention for a long time. The government has finally decided to introduce measures, such as claw back, to limit spending. These may be unfair measures and could result in the closure of private clinics and other diagnostic centers in coming years, but it is the result of chronic indifference about doing anything regarding overspending in healthcare. Efforts to contain overprescription of drugs and tests are also in the right direction and will likely lead to fewer bogus prescriptions.


This policy of overprescriptions has cost the budget tens of billions of euros year after year and explains why Greece has one of the highest percentage of pharmacies and pharmacists per capita in the world and is a world leader in doctors per capita, although its hospitals are woefully undestaffed in terms of nurses. Greece needs to tackle overspending in social benefits to speed up fiscal consolidation and create room for tax cuts. If it doesn’t, it will pay a big price in low growth rates for a long time.