Draft budget sets tough targets

The draft 2006 budget submitted yesterday to Parliament by Economy and Finance Minister Giorgos Alogoskoufis forecasts a general government deficit equal to 2.8 percent of Greece’s gross domestic product (GDP) from an estimated 3.6 percent this year, in line with the government’s commitment to its European Union partners. If the budget attains its deficit target – and it will have to, in order to avoid closer EU scrutiny or even a fine – it will be the first time in more than two decades that the deficit will be lower than 3 percent. Of course, such low deficits had been attained by the previous government but now have been revised upward thanks to this government’s controversial «audit» of public finances. Alogoskoufis said the new budget will not contain additional taxes and that reducing the deficit will be achieved by a crackdown on tax evasion and the tightening of expenditure in the public sector, where, he said, there is plenty of room for economies. Specifically, revenue is expected to rise to 7.4 percent, to 46.45 billion euros, from 43.26 billion in 2005. Expenditure is set to rise 4.8 percent to 50.18 billion euros from 47.88 billion in 2005. Of those, 40.58 billion concern primary expenditure, which will rise 6.4 percent, and 9.6 billion are interest payments on Greece’s debt, which will fall 1.3 percent in 2006. Spending on the Public Investment Program, deeply slashed in 2005, will rise 13 percent to 8.7 billion euros from 7.7 billion in 2005. Spending by ministry will rise from 1.8 percent, for the Ministry of Economy and Finance, to 8.8 percent for the Ministry of Agricultural Development and Foods and 12.8 percent for the small Aegean and Island Policy Ministry. The budget forecasts a GDP growth rate of 3.8 percent, one of the fastest in the eurozone, in 2006, up from 3.6 percent this year. This, Alogoskoufis said, will allow the unemployment rate to drop to 9.8 percent of the work force from 10.4 percent in 2005. Average inflation will also slow down somewhat, to 3.2 percent in 2006 from 3.5 percent in 2005. This means, Alogoskoufis said, that net wage rise will reach 1.7 percent in 2006. «Once again, the scaremongers who forecast a catastrophe are being proved wrong,» Alogoskoufis said. Among the revenue expected is income from the securitization of debt owed to the state. The government expects to get 1.8 billion euros in 2005 and 2 billion in 2006. Asked about this method of reducing debt and making up for his overconfident predictions for 2005, Alogoskoufis said the securitization has been designed following the rules of Eurostat, the EU’s statistics agency, and that it would be a «very big surprise» if the European Commission does not approve. However, in its warning to Greece over its excessive deficit, the Commission and the Council of European Finance Ministers (Ecofin) had said deficit reduction must not be achieved by one-off measures but through structural reforms that will limit spending. The budget also forecasts a drop in Greece’s public debt to 105.2 percent of GDP from 107.4 percent in 2005 and 109.3 percent in 2004. If attained, it will be the first sustained reduction of debt in years. The debt has hovered around 110 percent of GDP since the mid-1990s, despite Greece’s fast economic growth since then. This is seen by the EU as the greatest failure of Greece’s fiscal policy. Greece will borrow in 2006 through the usual instruments, that is, Treasury bills of duration up to a year; its benchmark 3-, 5- and 10-year bonds; through new issues of its 20-year bond; and through the issue of a 30-year, or even longer maturity, bond in order to push back the average maturity of the country’s debt to five years from four-and-a-half in 2005. About 80 percent of Greece’s debt has a fixed interest rate.