ECONOMY

Government forced to redraft budget after EU objections

The 2006 budget is being redrafted after European Economic and Monetary Affairs Commissioner Joaquin Almunia voiced objections about the use of a 2-billion-euro securitization of debt owed to the state as a means to lower the budget deficit to acceptable levels. Economy and Finance Minister Giorgos Alogoskoufis had counted on securitization to bring the 2006 budget deficit to 2.8 percent of GDP, down from an estimated 3.6 percent in 2005 – also with the help of securitization – and 6.6 percent in 2004. It is expected now that Alogoskoufis will present to Parliament another draft 2006 budget which will not include the 2-billion revenue from the securitization. This 2 billion must be offset with either an increase in revenue or spending cuts or, most likely, a combination of the two. When Alogoskoufis presented the draft budget last Monday, he was asked by Socialist opposition MPs if he had secured EU approval for the securitization. He had replied that things were under control which, as events showed, was not true. Now he is saddled with a difficult task – it is not easy to find 2 billion in savings, and raising taxes would be backtracking on explicit promises – and has become vulnerable to criticism from within the ruling party’s ranks. Almunia’s objection to securitization was, unfortunately, met with a tried-and-tested spin method used by past governments: The commissioner was presented as anti-Greek and his objections derided as lacking a social conscience. The government had announced that it would continue to cut corporate taxes and would start cutting income taxes beginning in 2007. After the latest developments, both now appear less likely since they would lead to a reduction in revenues. On the expenditure front, the government claims it is trying to reduce the bloated state sector. At the same time, it creates new state bodies and committees at the drop of a hat. The experience of this year shows that limiting state expenditures is difficult because the great majority of those are inelastic: They go toward debt servicing, wages, pensions, health and other basic services. Of a total of 40.58 billion euros in primary expenditure for 2006, 19.64 billion will go to wages and pensions, 8.5 billion to social insurance and health and 8.38 billion to operational costs. In this latter category, the only one where spending can be squeezed, the government has allowed for a 5.5 percent expansion in 2006. The issue is whether the state is willing to tackle excess spending and corruption. The case of former deputy finance minister Adam Regouzas shows that it probably cannot; that is why the government prefers words to action.