Budget, growth model among major challenges for new gov’t
The new government of Costas Karamanlis following Sunday’s election faces five major challenges, beginning with the execution of the current budget and the drafting of that for 2008, as well as continuing with the overdue reform of the country’s social security system and the formulation of the growth model that will prepare the economy for the period once the European Union-subsidized Community Support Framework (CSF) major investment program ends in 2013. This year’s budget, apart from the overruns that are normal in a pre-election period, has also been burdened with the cost of direct relief to the victims of the recent forest fires, estimated at about 300 million euros. The minister of economy and finance will have three months in which to limit any shortfall in revenues and overruns in expenses and contain the budget deficit to the planned 2.4 percent of gross domestic product. The outgoing government had drafted a plan to save about -500 million in expenses. Of this, -400 million will come from cuts in the investment and defense budgets, and the rest from various categories of public operating expenses. Any missing of targets in 2007 will be carried over to the 2008 budget, the first draft of which will have to be submitted to Parliament on October 1. This draft is to be compiled on the basis of a gross domestic product (GDP) revised upward by 25 percent, and is expected to be approved by Eurostat. It will include part of the cost of the promised pre-election handouts, estimated at -3 billion, but also will envisage a lower fiscal deficit, in line with the target of a balanced budget by 2010. Tax evasion A bill on tax evasion will be submitted to Parliament simultaneously with the first draft budget. It will include the government’s pre-election plan for the abolition of taxes for first-home buyers and the introduction of a 1 percent tax on inheritances. Also, there is a provision for 40 percent tax breaks for the retail receipts collected for an array of services, up to a maximum of 20,000 euros. The high cost of the measures, in combination particularly with the pre-election overruns, is seen certain to lead to an intensification of tax inspections. The government has secured in principle the consent of the European Commission for the extension of the deadline for the implementation of the CSF III by one year, as well as a restructuring of programs. Economy Ministry officials estimate that about 75 percent of allocations will have been absorbed by the end of the year, leaving more than -5.5 billion still to be absorbed by the end of 2009. The absorption of CSF IV funds will begin concurrently in this period, which will mean increased requirements for national funds to supplement EU investment subsidies. This is seen as exerting an additional strain on public finances in coming years. The formulation of a new growth model for the economy to bolster its competitiveness is the second great challenge facing the government after social security reform, which is also more urgent. After the Olympic Games of 2004, the growth of the Greek economy has been mainly based on private building activity. It was estimated that in 2006, 38 percent of the country’s economic growth was directly related to construction, against just 8 percent in 2003. Both major parties agreed before the election on the need to turn to the knowledge-based economy and to activities with high added value. Such a turn presupposes reform of the education system and an increase in spending on education and research, which remain far below the EU average as a part of GDP. On the basis of the revised GDP figure, spending on education is just 2.8 percent of GDP, against 3.5 percent on the basis of the unrevised GDP figure, and 5.2 percent in the EU.
