Economic conditions do not favor a program of fiscal expansionism

Less than two months before the general elections on March 7, the two major political parties have been battling it out to win over undecided voters and consolidate their electoral base but have yet to unveil their economic programs to show where they want to take the Greek economy over the next four years. Although both programs are expected to be long on generalities and short on specifics in order to minimize the political cost, there should be no mistake that Greece, a country with a high debt ratio and an aging population, cannot afford expansionary fiscal policies which would threaten its future economic growth. Therefore, the programs should try to reconcile fiscal responsibility with demands for increased social spending and higher economic growth. Undoubtedly, the presentation of the economic programs of both parties takes on a new dimension since they come at a time that public opinion polls show the race is close following Prime Minister Costas Simitis’s decision to step down and propose Foreign Minister George Papandreou as the new chairman of the ruling socialist PASOK party. The move succeeded in cutting deeply into conservative New Democracy party’s former hefty lead in the polls, turning the election into a battleground. Of course, in Greek political history, it is not rare to see political parties forget about their economic programs once they are in power, an indication that they regard them as yet another pawn in their political chess game. This explains why these programs usually excel in grammar or syntax but fail to impress in terms of substance, scientific work and intelligence. Still, the texts, underlining priorities and goals, help to provide some hints of the general direction the future economic policy is going to take and its impact on public finances. Since no major party has announced its economic program yet, one has to draw some conclusions based on the positions taken by the party leadership on various issues over the next few weeks or months. This is more difficult when it comes to the Socialists as Foreign Minister George Papandreou appears to be working with a new economic team. Nevertheless, as far as the conservative New Democracy party is concerned, it looks as if the emphasis will be on limiting the growth of primary spending by doing away with waste, even higher GDP growth rates through deregulation, the liberalization of certain input and output markets and privatizations and rationalization of the public sector. According to leaks from Papandreou’s new economic team, the new economic policy mix will give more emphasis to the redistribution of income as well as to adopting other measures, such as the gradual introduction of the 35-hour work week. An agreement with Turkey to mutually decrease military spending will also be sought to help make more room for social spending. Despite all the good intentions and perhaps some good first-time initiatives, there should be no mistake that both parties will be judged by their ability to deliver high real GDP growth rates in excess of 4.0 percent per annum along with a more even distribution of growth among sectors and people and reducing the public debt ratio. This is easy to say but difficult to attain. Although the Greek economy has outpaced average EU GDP growth since 1996, the degree of fiscal consolidation and its quality have been lagging. Even though most analysts agree that fiscal adjustment is more sustainable when primary expenditures fall, Greece has not followed this path. Primary spending has gone up and Greece has relied on higher tax revenues and lower interest outlays on the public debt to bring down its budget deficit. This low quality fiscal adjustment has also had a direct impact on public debt reduction. Indeed, the Greek debt ratio, that is, the public debt as a percentage of GDP, declined by just nine percentage points four years after hitting its peak in 1996. Among the EU countries, only Portugal matches Greece’s record, while Italy is the only other EU country to have performed worse by reducing its debt ratio by only eight points four years after its peak in 1994. By contrast, Ireland reduced it by 20 percentage points and Belgium by 13 percentage points according to S&P figures. The same pattern holds true if one takes a look 10 years or less after the debt ratio peaked. Fortunately, Greece, unlike other EU countries, does not face a weak domestic aggregate demand. Consumption spending is growing at healthy rates and investment spending is robust, aided by works related to the Summer Olympics and huge EU inflows, estimated at about 3.0 percent of GDP in the last three years. It is not necessary, therefore, to boost aggregate demand further by increasing budget expenditures, according to rational economic thinking. However, Greek political parties seeking votes to win the general elections are prone to making promises in the form of higher pensions, wages for civil servants and higher social spending on health, education and other areas which tend to augment primary spending and put fiscal consolidation in peril. This may be tolerated in a country where the public debt ratio is relatively low, meaning 60 percent of GDP or lower, but cannot be so in Greece where the debt ratio is estimated to have exceeded the 100 percent of GDP mark again in 2003. This is more serious given the fact that its population is aging and therefore more money must be spent on pensions and age-related spending in the future unless unfavorable demographics change. It is true that the collapse of the Stability Pact puts less pressure on Greece to put its public finances in order. Still, for a country facing a widening budget deficit, a huge debt ratio and an aging population, having its major political parties come up with economic programs that embrace expansionary fiscal policies is likely to translate into slower GDP growth rates and political trouble ahead. The reason? External forces, the markets or the EU Commission sooner or later will force a severe fiscal adjustment that will take its toll on economic growth. Let’s hope both major political parties take this into account when they draw up their economic programs.

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