High public debt blocks reforms

The fact that Greece’s high public debt acts as a brake on development is not merely a theoretical finding to emerge from macroeconomic analyses. First and foremost, it has clear consequences in practice, for example the fact that it does not allow the funding of radical reforms necessary for the future of the economy. One of the most urgent such reforms is that of the social insurance and pension system. The Bank of Greece believes that the country’s public debt must be brought down to 60 percent of gross domestic product (GDP) for the government to be able to afford the reforms. For this to happen, the economy’s growth rate must remain steady at 5 percent until 2015, and the budget’s primary surplus will have to represent 6.5 percent of GDP. These two requirements would translate into savings of some 120 billion euros over roughly eight years, or more than 15 billion annually. Moreover, taking into account also projections of surplus budgets after 2010, the annual savings would be even greater. Therefore, the reduction of the public debt, which now stands at 104 percent of GDP – the second highest in the EU – is not just a basic requirement regularly recommended by international organizations such as the OECD and Eurostat. It is a matter of great urgency, particularly when public spending on pensions is projected to rise from the present level of 12.4 percent of GDP to 22.6 percent in 2050, or by about 21 billion. By way of comparison, the average cumulative increase in public spending on pensions in the 25 European Union member states (before the accession of Bulgaria and Romania) is projected at just 2.2 percent of GDP, and at 2.6 percent in the eurozone. Greece’s social insurance and pension problem is particularly acute, given that the country is projected to have the second-highest ratio of population aged over 65 to those aged 15-64 (the so-called «old age dependency» ratio) after Spain. In addition, compared to other countries where the problem is less pressing, Greece is late in reforming social insurance. Ministers are seeking solutions combining several parameters: First, the creation of conditions for the maintenance of high growth rates. Second, a reduction in unemployment, which further burdens the system. Third, bold public spending cuts. Fourth, increasing revenues, particularly from part privatizations and state holdings even in unlisted companies. Fifth, more efficient tax revenue collection through reforms and combating tax evasion, and Sixth, curbing the widespread evasion of social security contributions.

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