2006 budget sets ambitious targets, remains pro-growth

The draft 2006 budget that Economy and Finance Minister Giorgos Alogoskoufis submitted to Parliament yesterday is one of ambitious goals and high expectations: It estimates that the deficit will be equal to 2.6 percent of Greece’s GDP, down from 4.3 percent in 2005 and that GDP itself will grow 3.8 percent in 2006, up from 3.5 percent. The government’s main aim is to mobilize the private sector to underwrite the expanded growth through investment. The draft budget provides for 5.4 percent in overall investment and forecasts an unemployment rate of 9.8 percent of the work force, down from 10.4 percent in 2005. Alogoskoufis places much of his hopes on the effectiveness of legislation to reform the tax code and provide incentives for private sector investment. Numerous spending cuts abound, including on defense expenditures. The final draft provides 100 million euros less for weapons systems (1.5 billion euros, instead of 1.6 billion), while the final figure spent on weapons systems procurement in 2005 will reach 1.4 billion euros instead of 1.6 billion. The greatest part of the deficit cutting will be achieved through permanent measures, but the government has projected 1.1 billion euros in revenues from so-called one-off measures which are frowned upon by the European Union, as the episode of the debt securitization has demonstrated. Achieving the goals of the 2006 budget hinges upon the effectiveness of tax authorities in cracking down on tax evasion. Once again, the government has set a revenue growth target of 11.2 percent, the same initially set for the 2005 budget before the government beat an ignominious retreat. It is now estimated, somewhat optimistically that revenue growth for 2005 will reach 6.7 percent. Expenditure growth will be contained at 4.8 percent in 2006, compared to 5.3 percent in 2005. However, expenditures on wages and pensions will increase to 6.1 percent, compared to 5.8 percent in 2005. This corresponds to an average pay rise of 3.7 percent for public sector employees and 4.4 percent for pensioners. Spending on social security, including spending on health treatment, will rise 8.2 percent, while consumption expenditure will decrease 3.9 percent. Public debt According to the draft budget, Greece’s public debt will reach 202.7 billion euros, or 104.8 percent of GDP at the end of 2006, from 194.33 billion, or 107.9 percent of GDP, at the end of 2005. The European Commission has forecast a smaller decline, as a GDP percentage, to 106.8 percent. To service this debt, the government will have to spend in 2006 9.6 billion euros on interest and 18.13 billion on repayment of principal, that is, a total of 27.73 billion, more than will be spent on wages, pensions and social security benefits combined. A sum of 1.2 billion euros in revenues from privatizations, out of a projected total of 1.6 billion, will be used toward reducing the debt, up from 820 million in 2005. Alogoskoufis has said that the state will sell its remaining stake in Emporiki Bank, sell a further part in ATEBank, list the Postal Savings Bank on the stock market and push for the listing of Athens International Airport SA. The Ministry of Economy and Finance once again promises that there will be fewer state guarantees on public utilities loans, in order to limit expenditures arising from guarantee forfeiture. Several such efforts have been made in the past, all unsuccessful. The government has promised to reduce the public debt to a level below 100 percent of GDP by 2008. This would make funds available to finance pro-growth policies.

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