Excessive deficits will persist through 2007, OECD warns

Greece’s budget deficit will not only remain above the level deemed acceptable by the European Union over the next two years, but will increase in 2007, the Organization for Economic Cooperation and Development (OECD) forecasts in its latest report. The report, which was released yesterday, estimates that Greece’s 2005 deficit will be equal to 4.5 percent of the country’s gross domestic product (GDP). The deficit will be cut to 3.2 percent of GDP in 2006 but will rise to 3.6 percent in 2007. OECD recommends that the Greek government tighten public spending and reform the social security system and public administration. It also encourages the government to proceed with its planned measures to restrict excessive spending by public utilities. Yesterday, the government introduced a draft bill on public utilities which effectively abolishes permanent job status for new employees and imposes tighter oversight on utilities’ spending. GDP growth will reach 3.5 percent in 2005, slow down to 3.3 percent in 2006 and accelerate to 3.5 percent in 2007. Inflation, measured under the European Central Bank’s Harmonized Index of Consumer Prices, will continue being higher than that of the rest of the eurozone, averaging 3.6 percent in 2005, 3.4 percent in 2006 and 3 percent in 2007. The unemployment rate will only drop slowly, from 10.6 percent of the work force in 2005 to 10.5 percent in 2006 and 10.3 percent in 2007. Both exports and imports will continue to grow, while public consumption growth will reach 2.9 percent in 2005, 1.3 percent in 2006 and 1.3 percent in 2007. On growth, OECD attributes the significant deceleration in 2005 – 3.5 percent from 4.7 percent in 2004 – to a sudden drop in investments post-Olympics. Growth was fed by fast consumer spending, itself underpinned by credit growth, and exports. Growth recovery in 2007 will be based on domestic demand, the report says, adding that Greece’s growth rate will continue to outpace the eurozone average. The gradual cuts in corporate tax rates and the new legislation on investment incentives may help investments, as will the wider use of public-private partnerships in infrastructure projects. Job growth will be helped by incentives toward more flexible forms of employment but the growth rate will be very slow and the government will not realize its goal of lowering the unemployment rate to single digits. The report forecasts a fast growth of exports and services, albeit from a low base, despite the long-term loss of competitiveness due to rising costs. Export growth will reach 7.8 percent in 2005, 8.2 percent in 2006 and 8.8 percent in 2007. Imports will grow as well – 1.3 percent in 2005, 7.2 percent in 2006 and 7.1 percent in 2007. Continued fiscal consolidation requires greater control over primary spending, including decisive measures to reform social security and the state administration. OECD does forecast a far lower budget deficit in 2006 (3.2 percent of GDP) but this includes one-off measures that will account for 0.6 percent of GDP. The report highlights the importance of a crackdown on widespread tax evasion and adds that further progress in structural reforms will provide a more stable environment for long-term growth. The government submitted the draft 2006 budget to Parliament on November 21. It maintains that it will reduce the deficit to below 3 percent of GDP in 2006, but sets highly ambitious targets for revenue growth (11.2 percent) and underestimates several spending items.

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