Public debt clouds fiscal policy

Greece has made significant progress toward streamlining its public finances over the last few years, as the country’s admission into the eurozone from the start of 2001 and the small general government budget surplus testify. Nevertheless its public debt, which remains one of the highest in the European Union, appears to be sending confusing signals about the conduct of fiscal policy, as it is declining as a percentage of GDP but still rising in absolute nominal terms. The final 2002 draft budget, to be voted on in Parliament in the next few days, is widely regarded as neutral to slightly contractional on economic activity and based on more realistic assumptions about GDP growth next year. GDP growth is projected at 3.8 percent, which is lower than the OECD’s but higher than the European Commission’s 3.5 percent GDP growth forecast. Along these lines, the projected debt-to-GDP figures for this year and next were adjusted upward to reflect the new assumptions. The general government debt as a percentage of GDP is now projected to fall to 99.6 percent this year from 102.9 percent in 2000. The debt-to-GDP ratio is projected to drop further, to 97.3 percent in 2002. The general government budget includes the central government budget balance as well as the surplus of social security funds. Nevertheless, a closer look at the public debt-to-GDP ratio trajectory shows that the reduction is partly due to the definition of debt. According to Eurostat, receipts from the sale of exchangeable bonds, privatization securities (prometoha) and securitization funds amounting to some 1,84 trillion drachmas this year are not included in this definition of public debt. Had these receipts been included in the definition of public debt, the general picture would not be as rosy as it looks at first glance. It should be noted, however, that these receipts have helped offset other types of state financing such as capital injections in public enterprises aimed at strengthening their balance sheets and the amortization of military debt. Moreover, receipts from these securities will be channeled into the settlement of large arrears to the country’s largest social security funds IKA in 2002. According to some economists, such as EFG Eurobank’s Plato Monokroussos and Salomon Smith Barney’s Miranda Xafa, these receipts may partly solve the puzzle arising from the declining debt-to-GDP ratio and the rising public debt in nominal terms both this year and next. This discrepancy is puzzling, because the projected central government primary budget surplus-to-GDP ratio is still high and the interest payments-to-GDP ratio continues to decline. The projected primary budget surplus stands at 5.3 percent of GDP this year and is projected at 4.9 percent next year while interest payments are forecast to fall to 6.4 percent of GDP in 2002 from 7.4 percent this year. Undoubtedly, the Greek government is not doing anything improper in dealing with such issues relating to public debt. Other EU governments have done the same long ago. However, the issue here is whether shifting the debt burden to state entities that fall outside the definition of general government, constitutes the right fiscal policy. The answer is clearly no. The only advantage in the pursuit of this policy is buying time to implement painful but necessary economic measures. So far, there is little material evidence supporting this hypothesis and therefore one is inclined to believe that this policy has more to do with postponing these crucial decisions linked to the competitiveness of the Greek economy rather than anything else. These decisions have to do with overhauling the public sector, privatizing some loss-making state corporations and further liberalizing and deregulating some output and input markets to enhance competition. Nobody can dispute the fact that the Greek economy has taken big steps in the right direction in the last few years, especially in the field of fiscal consolidation. Nevertheless, the obvious discrepancy demonstrated by a declining debt-to-GDP ratio and a rising public debt in the face of large primary budget surpluses calls for drastic action. The physical introduction of the euro makes the implementation of structural reforms more urgent than ever before.

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