Keeping options open

The Greek government surprised no one by sticking to its goal of bringing the budget deficit below the 3.0 percent of GDP ratio in 2006 in the fiscal progress report it submitted to the European Commission last week. However, by choosing to replace the 2.0 billion euros initially sought from the securitization of delinquent tax arrears  by a mix of other one-off measures, a war on tax evasion and cuts in the public investment budget, the government’s degrees of freedom were reduced, increasing the likelihood that harsher fiscal measures will be taken in the first half of 2006 to help abide by the main tenet of the Stability and Growth Pact. This in turn may dent GDP growth and undermine the same fiscal goal it is aiming for at next year. To this extent, the government should not give up on securitization so easily and start preparing alternative ways to cut the deficit below 3.0 percent of GDP in 2006 without hurting growth. 2005 budget woes About this time last year, the conservatives had unveiled the 2005 budget and produced a set of very disappointing numbers on public finances over the years, which they blamed on their Socialist predecessors. The figures revealed the derailment of public finances to an unprecedented degree, earning the country another credit rating downgrade from Fitch Ratings and the ire of Commission and Eurostat officials. It was clear at the time that the 2005 budget deficit target was difficult to attain even if GDP growth remained strong. It took the government a few months,  a sharp drop in tax revenues, especially VAT (value-added tax) and the «help» of the Commission warnings to come to the same conclusion. In March, Finance Minister Giorgos Alogoskoufis was forced to take action, resulting in the 1.0 percentage point increase in the VAT rates and a pickup in other consumption taxes on tobacco and alcohol effective April 1. These measures were not enough to help meet the budget deficit target but the worst fears of a noticeable slowdown in economic growth did not materialize. Faced with the new reality, the government sought a way out by using the proceeds from the securitization of  delinquent tax arrears to bring the deficit down to 3.6 percent of GDP. According to the latest report sent to Brussels, this amounts to 1.5 billion euros, smaller by 0.3 billion euros compared to the 1.8 billion in the draft 2006 budget. To further appease the Commission officials and get their blessing on the 2006 budget, the government replaced the 2.0 billion euros in securitization proceeds with a mix of one-off measures, thought to be more acceptable to the Commission officials, and so-called permanent measures. EU unimpressed Well, this may not work either. If leaks from Brussels are correct, the EU’s executive branch will estimate Greece’s 2005 budget deficit at over 4.0 percent of GDP and next year’s gap above 3.0 percent.  Undoubtedly, the situation is very complex since it is still not known whether the European Commission will accept that this year’s securitization proceeds are counted towards reduction of the budget deficit. Of course, Eurostat is going to have the final word on that and it will be very interesting to see what is happening if Eurostat OKs the Greek transaction, as it did in the case of Portugal. Complicating things further is the argument advanced by government officials that Greece, unlike Italy, has been given notification to end its excessive budget deficit by the end of 2006 under the old Stability Pact. This means in practice that Greece is not legally obliged to bring its budget deficit below 3.0 percent of GDP in 2006 by resorting only to permanent measures and avoid taking one-off measures, including the proceeds from the securitization of delinquent tax arrears.  So, it is likely that the whole issue will be resolved at the meeting of EU economic and finance ministers in January. Since the outcome of these deliberations (assuming Eurostat gives the green light to the Greek transaction) is unknown, the government prudently decided to close the gap via other means. It is doubtful, however, whether the 5-year extension of the contract with Germany’s Hochtief for the rights to operate the Athens International Airport for 30 years from 25 at present or the extension of the casinos’ licenses and other such measures will net the government some 1.1 billion euros. Equally uncertain is the outcome of a crackdown on tax evasion although the latter is known to be widespread in Greece. It is certain, though, that chopping off the public investment budget will have an adverse effect on a few business sectors, such as construction, and stir up intergovernmental feuding and finger-pointing, sending a bad message to the business community about the functioning of the government. Undoubtedly, it is not an easy task for the Greek government to slash its budget deficit below 3.0 percent of GDP in 2006 without taking new restrictive measures in the first half of 2006 if next year’s securitization is completely abandoned. This will become more apparent if the ECB starts hiking its official interest rate and consumer along with mortgage lending cools off, taking its toll on private consumption spending, the main pillar of Greek economic growth. Of course, this along with the cuts in the public investment budget will contribute to an economic slowdown and have a negative impact on tax revenues, necessitating even harsher measures and risking opening a vicious cycle. Knowing all of the above, the government should not repeat last year’s mistake and take a wait-and-see attitude toward the implementation of the 2006 budget. It should pursue the 2006 securitization agenda in all EU forums and seek more creative ways to meet next year’s target to avoid undermining economic growth. Perhaps jacking up the special consumption tax on fuel to keep prices at the pump at current levels if international oil prices fall next year would be one of them.

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