Social package not so big

Prime Minister Costas Simitis unveiled last week a package of social measures worth some 2.36 billion euros in what seems to herald the opening of the campaign for the next general elections. As expected, the measures were hailed by members of the ruling socialist party PASOK and criticized by conservative New Democracy party deputies. Still, this package, along with the political parties’ tendency to promise more benefits to different interest groups, highlights once again Greece’s real challenge in the years to come – to put its public finances in order in a less favorable interest rate and growth environment. Admittedly, what amazes is the sheer size of the new package of 2.36 billion euros, or 1.45 percent of GDP, which seems larger than initial expectations and should be regarded as the government’s PR to improve its image and close the gap with leader New Democracy at the polls. The package is, however, less generous than it first appears, if one takes a closer look at some of the items included. Appearances deceive First, some 865 million euros for pay rises and pension increases in the public sector should not have been part of the package since it is known they would have been paid out from January 1, 2004. Without this money, the cost of the package amounts to about 1.5 billion euros, or 1.1 percent of GDP. Second, only half of the monthly pension increases of 30 euros to farmers and low-income pensioners should have been part of the package for the same reason. Third, as government officials point out, the reduction in taxes on new cars and motorcycles, estimated to cost some 90 million euros, will be partly offset by higher taxes collected due both to increased demand for new vehicles and perhaps the substitution of smaller cars by larger cars. Based on engine size, the tax cuts favor large cars over smaller cars. Third, the cost of all measures has been calculated on the assumption that all people and companies entitled to the benefits will take advantage of them, something which, going by past experience, is not likely. Fourth, the revenue loss from tax cuts on diesel to farmers and small and medium-sized enterprises, estimated at 90 and 70 million euros respectively, should be much lower for two reasons. First, increased diesel consumption should produce more tax revenues. Second, and perhaps more important, many farmers cheat the State by using heating oil, which is cheaper, instead of motor fuel, and even get paid back by the State the VAT (value added tax) they never paid in reality. It is estimated that the State returns to farmers an amount in excess of 130 million euros per year for that reason. So, it is possible that the State will not lose money and may even save more money through the measure. Critics claim that although both major political parties know about this scam, nothing has been said or done to stop it in fear of losing the crucial support of farmers in the next general elections. All in all, the cost of the package of social measures announced by the Prime Minister last week is much lower than it appears and although it is difficult to gauge its exact size, it should not exceed 1.2 billion euros or 0.85 percent of GDP. This, of course, does not mean it is small or insignificant. Moreover, having entered the pre-election period, the chances are that more spending to satisfy different interest groups may be on the way despite the fact that budget figures for the first seven months of the year show Greece will almost certainly overshoot the 0.9 percent of GDP target set by the country’s updated Stability and Growth Program by a wide margin. Higher-than-projected primary and public investment budget expenditure, along with a significant shortfall in public investment budget revenues, primarily from the EU, help explain the divergence and set the stage for a higher deficit in 2003. Alpha Bank estimates the budget deficit may even exceed 1.6 percent of GDP. Government officials admit there will be a divergence but they do not see the budget deficit surpassing 1.1-1.2 percent of GDP, with economic growth currently projected at 4.0 percent versus 3.8 percent originally predicted in the budget. Betting on growth The argument of stronger GDP growth, perhaps as high as 5.0 percent next year, underpins government hopes that the 2004 budget will not be derailed even if elections and the 2004 Olympics entail more expenditure than usual. Although this argument is valid, one should not underestimate the fact that permanent spending is being added to the budget each year and a good deal of it is expected to be financed by higher revenues on the back of a growing economy. Moreover, figures show that the primary budget surplus, which does not include interest expenses, and is considered a better gauge of fiscal consolidation, is on the decline as a percentage of GDP in the last couple of years. This in turn raises questions about the country’s ability to bring its high public debt-to-GDP ratio, in excess of 100 percent, to much lower levels in the next few years. Greece’s failure to adhere to stricter fiscal discipline while riding the wave of strong economic growth and low interest rates for a number of years is a cause for concern. Optimists say the Greek economy will keep on growing for years, even after 2004, as EU structural funds continue to flow in and improved infrastructure leads to greater efficiency and productivity gains. This assumption, though, is debatable and may turn out to be wrong. Slower but satisfactory growth rates and higher interest rates is a more likely combination in the next few years but do not bode well for Greek public finances. In order to be sure it does not fall into the dangerous trap of higher fiscal deficits and spiraling public debt, Greece should do more than rely on strong growth to offset the cost of various social packages and «hidden» expenditure even though this requires some political sacrifices.