Drafting of ’06 budget begins

The government will begin drafting the 2006 budget this week under the shadow of its commitment to the European Union to limit the deficit to acceptable levels – that is, below 3 percent of Greece’s gross domestic product (GDP). The government cannot find a way around this promise, not without incurring a heavy fine and an even closer monitoring of its economy. Thus, it is expected the draft bill which will be submitted to Parliament in October will forecast a 2006 budget deficit of less than 3 percent of GDP. This, however, was also the case for the 2005 budget, which had forecast a 2.8 percent deficit and a growth of 3.9 percent. It had become evident long ago that neither estimate was accurate. At that time, it should be noted, the government had said that the 2004 deficit amounted to 5.3 percent of GDP. Only a few days ago, Economy and Finance Minister Giorgos Alogoskoufis admitted the deficit was closer to 6.7 percent of GDP – without, however, precluding a further upward revision. At the moment, Alogoskoufis is more concerned with implementing, as best as he can, the 2005 budget. Data from the first five months of the year are disappointing, especially on the revenue front, where government predictions of double-digit growth, compared to the previous year, are way off. Alogoskoufis remains confident that revenue growth will accelerate during the second half, mainly thanks to the introduction of higher Value Added Tax (VAT) rates in April. Expenditure has more or less been contained, although not yet at the levels forecast in the budget. However, Alogoskoufis and his deputies are well aware that the second half of the year always sees a rise in expenditures. To forestall such an eventuality, Deputy Economy and Finance Minister Petros Doukas yesterday reminded his government colleagues the government will reject outright any supplementary funding demands – and cut from expenses already stated in the 2005 budget. It will, for example, provide only 70 percent of the amounts earmarked for the procurement of medical supplies, blood infusion equipment, diesel and heating fuel, as well as for paying private contractors. While bringing down the budget deficit as soon as possible is a short-term problem, the economy faces more intractable problems over the long term. The social insurance system is a time bomb, and the country will face a serious fiscal crisis if urgent measures are not adopted, the Organization for Economic Cooperation and Development (OECD) says in a report which will be presented to Alogoskoufis on Thursday. According to sources, the report’s authors see two main challenges for the Greek economy. First, there must be fiscal recovery, which is urgent and must involve spending cuts leading to a shrinking of public debt, which now exceeds 110 percent. Second, there must be real convergence with the rest of the EU, where Greece lags behind in key indicators, particularly competitiveness. The aging population is exacerbating the social insurance problem and the fiscal situation, OECD says. The report noted the need for bold structural measures, the immediate opening of product markets and greater flexibility in the labor market.

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