IOBE sees high growth next year, uncertainty after that

The Olympic Games, strong domestic demand and a possible recovery in the eurozone will help maintain Greece’s high economic growth in 2004, according to the latest quarterly report by the Foundation for Economic and Industrial Research (IOBE). IOBE, a think tank close to the Federation of Greek Industries (SEV), also said that investment will continue to grow in 2004, since many Olympics-related projects will finish next year. Lax fiscal policy The 2004 budget estimates confirm that there was excess spending in 2003, which led to a greater central government deficit and whittled down the primary budget surplus. In its previous quarterly report, IOBE remarked that fiscal policy in 2003 appeared to be more expansive than in previous years and said that this would slow down fiscal adjustment, that is, the reduction of the public debt. The data available on the implementation of the budget since that report and the 2004 budget estimates confirm that view. The 2004 budget was drawn up for a year in which national elections will take place. It is therefore not surprising that its features include a faster increase in spending, a characteristic of all pre-election budgets. This confirms the Socialist government’s shift to a more expansive fiscal policy, even though it had tried to keep a lid on spending on previous pre-election budgets, in 1996 – a year of early elections – and 2000. A positive feature of the 2004 budget is that it implements major changes in tax policy which should help boost demand and contribute to high growth in 2004. Spending increase On the other hand, spending will increase faster than in 2003. The budget forecasts primary spending, that is, all spending except on debt servicing, to rise 7.7 percent in 2004, more than twice the expected inflation rate, up from 6 percent in 2003. Expenditure on civil servants’ wages, especially, is expected to rise 7.9 percent in 2004, up from 3.7 percent. According to the budget’s estimates, net revenues will increase by 6.2 percent, allowing the primary surplus to remain at the 2003 level (2.1 percent of the country’s gross domestic product, or GDP). However, experience shows us that spending growth will exceed estimates, accentuating the lax character of the government’s fiscal policy. These developments are part of the government’s political choices, which mandate that there be a looser fiscal policy in the runup to elections, especially if the government is to reverse its current negative standing in the polls. IOBE points out that this loosening should not be made at the expense of longstanding commitments to turn the budget deficit into a surplus and lower the public debt, which still hovers above 100 percent of the country’s GDP. Increases in «social expenditure,» announced with such fanfare by the government in October, could have taken place without ill effects if there were better monitoring of spending and cuts were made. No such thing is expected to happen next year. As things stand, increased spending threatens the economy’s stability and jeopardizes its chances for sustained high growth.