The new conservative government has proven right all commentators and others who predicted it will not push ahead with economic reforms prior to the elections for the European Parliament this month and the Olympic Games in August. If polls turn out to be right and the conservatives beat the Socialists by a wide margin at the polls next weekend, then all pundits should admit the «economic policy of inaction» has paid off politically speaking, at least for the time being. Sooner or later though, the time of reckoning will come because while economics may sometimes take a back place, it always catches up with politics – possibly involving some accounting schemes. Making good on its pre-election promise to bring about more transparency in the country’s fiscal accounts, the new government proceeded with an audit of fiscal balances. The audit resulted in the upward revision of the actual 2003 budget deficit to 3.2 percent of GDP versus the 0.9 percent it was estimated at in the 2003 budget and 1.7 percent by the European statistics service Eurostat. This makes Greece one of the violators of the 3.0 percent of GDP rule in the European Union (EU). This budget figure, which may be revised further in the fall, was mainly the result of higher social transfers in terms of pensions and wages paid to civil servants, the spending overrun on Olympic projects, the shortfall in public investment budget revenues and the reallocation of value-added and public investment budget revenues from the 2003 to the 2004 budget. The reallocation, which accounted for about 1.0 percent of GDP, was criticized by the opposition Socialists, who said the government’s sole goal in doing so was to maximize political benefits ahead of the June elections for the European Parliament. Although it is likely that political motives were behind the government’s decision to reclassify revenues in excess of 1.4 billion euros last year to help this year’s budget, it is easy to understand that surpassing the 3.0 percent of GDP budget deficit limit will bring in the Eurostat, the EU’s statistical arm. This means closer scrutiny of fiscal finances, depriving the government of precious degrees of freedom in fiscal management. Non-partisan officials who are familiar with the ways successive Greek governments use to window-dress public finances consider it a mistake since the presence of officials from Eurostat will make it harder «to change the figures.» Looking to cut deficit If these Greek officials are right and Eurostat officials do follow fiscal developments closely from now on, then the government may find itself trapped in the fall. It will be even more so if spending overruns related to the Olympic Games fulfill new pessimistic projections and underlying current revenue growth continues to disappoint as in the first quarter. Perhaps sensing this unpleasant reality, government officials are seeking new ways to reduce even last year’s budget deficit below the 3.0 percent of GDP mark. Although it has not been confirmed, recent press reports say surpluses of some 1 billion euros have been found in public entities which have not been previously recorded in the fiscal accounts of the general government. Of course, these surpluses, if true, raise questions about the accounting methods the government uses in shoring up public finances, methods criticized by the conservatives while in opposition. In addition, they call into question the ability of the mechanism responsible for compiling the figures as well as their credibility. Given the fact, though, that the benefits far outstrip the costs of a smaller-than-3 percent of GDP deficit, one should not be surprised if a new way is found to produce the desirable fiscal outcome. Even so, this is just a temporary way out. Sooner or later, Greece will have to confront a new reality in the enlarged EU of 25 countries. The revision of the Stability and Growth Pact may be set in motion as early as this fall when the successor to European Commission President Romano Prodi is chosen. Officials, who are familiar with the deliberations, consider it almost certain that the new EU fiscal rules will place more emphasis on the public debt rather than the budget, adding that this has the backing of the 10 new entrants as well as some large «old» EU states. The say «public debt is the residual,» pointing out that the new set of rules may apply on the 2004 figures. It takes no Ph.D to understand that Greece will be among the losers if this kind of revision of the pact takes place. The last thing the new government would want to have is Eurostat officials on its back. So, given the risks involved, it is likely the government will try to avoid bringing in Eurostat and is therefore likely to seek to produce a smaller-than-3 percent of GDP deficit for last year. Projected to borrow more than the 30-billion-euro figure initially sought, Greece will have the money to finance primary expenditure even after the Olympics and may resort to additional borrowing if necessary. This, however, like any accounting scheme envisaged, does not solve the problem of fiscal imbalances, aggravated by slower GDP growth. Greece will have to confront the root of its fiscal problem, that is, expansionary incomes policies, which produce higher-than-planned primary spending. This is admittedly difficult when expectations are high and it is not certain whether 2005 will be another election year. The new government, however, has no option but to communicate the reality to the people and move swiftly to tackle the fiscal imbalances and bring down the public debt before the revised Stability Pact, or whatever its name will be, comes into play. Economics cannot wait forever for politics.