An ambitious budget

The 2005 budget, the conservative New Democracy government’s first, has set ambitious goals, as Economy and Finance Minister Giorgos Alogoskoufis himself admitted yesterday when presenting the final draft at the General Accounting Office. The budget aims at ending years of deficits in violation of the standard set by the EU’s Stability and Growth Pact – a violation that became apparent only after the newly elected government decided to audit public finances – in one go, by slashing the deficit from a projected 5.3 percent of GDP in 2004 to 2.8 percent in 2005. Alogoskoufis repeatedly said yesterday that the government would achieve this goal in 2005, although he has already considered the alternative, as evidenced by statements he made following Tuesday’s meeting of EU finance ministers (Ecofin), saying that his colleagues were ready to give Greece until 2006 to bring its deficit below 3 percent. To achieve this in a single year, the budget makes two bold assumptions: first, that economic growth will actually accelerate next year, to 3.9 percent, from an estimated 3.7 percent this year, and second, partly a consequence of the first assumption, that revenues will increase by 7.7 percent. According to the report that accompanies next year’s budget, «the main factor(s) boosting (economic growth) will be private sector investment and exports of goods, which are expected to increase 7.9 percent and 7.5 percent, respectively.» In other words, Alogoskoufis pins his hopes on accelerated economic growth on the impulse provided by tax reform, especially cuts in the corporate tax rate. The need to not forgo too much revenue at once precluded an immediate cut in the corporate tax rate from 35 percent to 25 percent, as New Democracy had promised ahead of the March election. Instead, according to the provisions of the tax law submitted earlier this month to Parliament, the cut will be phased in over three years: 32 percent in 2005, 29 percent in 2006 and 25 percent in 2007. Alogoskoufis made it clear yesterday that no further cuts are envisioned. The minister’s optimism that the rate cut will boost private investment is not shared by many businesspeople. Odysseas Kyriakopoulos, the chairman and executive president of the Federation of Greek Industries (SEV), was withering in his assessment made to a parliamentary committee on Wednesday. «The new tax legislation is neither simple nor growth-friendly and it does not boost competitiveness and employment. We expected a radical reform of the tax system. Unfortunately, another opportunity for radical decisions by a new government is being lost,» he said. Kyriakopoulos further forecast «a declining growth rate» and added that, three years hence, the government will wonder what went wrong and will have to start all over again. Alogoskoufis, and the government as a whole, clearly do not share that view. In fact, he forecasts a further acceleration of growth to 4 percent in 2006 and 4.2 percent in 2007. This, along with measures to contain spending, will help lower the budget deficit further, to 2.6 percent of GDP in 2006 and 2.5 percent in 2007. Growth, fiscal rectitude – but not austerity, Alogoskoufis emphasized – and privatizations will help reduce total debt from 112 percent of GDP this year, to 109.5 percent in 2005, 106 percent in 2006 and 102.7 percent in 2007. In trying to achieve these goals without resorting to deep spending cuts, or tax hikes, Alogoskoufis is taking a big gamble.