Fiscal challenges loom strong

The continuation of fiscal consolidation and the bolstering of competitiveness are among the major challenges facing the government in its new term. The 2008 draft budget, submitted to Parliament on Monday, envisages a lowering of the country’s fiscal deficit to 1.7 percent of GDP, which is even lower than the target set in the Stability Program (1.8 percent), in order to make up for this year’s overruns and make a more decisive step toward achieving a balanced budget by 2010. The deficit is projected at 2.5-2.6 percent of GDP this year, against a target of 2.4 percent. In order to bring this down by 0.8 percent of GDP, the government has drafted a tight budget which provides for a 5.5 percent rise in spending and a 7.5 percent increase in revenues. The incomes policy allows for increases of 3 percent in salaries and 4 percent in pensions. New model needed However, changing the uncompetitive growth model which is largely based on borrowing and European Union subsidies is a precondition for a sustainable reduction of the deficit and public debt. The central government debt has already overshot the 2007 budget target in the first half, reaching 236 billion euros. Budget expenditures for debt repayments are projected to reach 33.7 billion euros this year, from 29.7 billion euros in 2004. Debt servicing is projected to swallow up 80 billion euros in the next two years. Interest payments are estimated at 9.7 billion euros, which equals the spending earmarked for social security and healthcare and is 1 billion euros higher than the Public Investment Program and total public consumption. Business and household debt to banks totaled 199.9 billion euros in July. The combined public and private sector debt exceeds 440 billion euros. Difficult transition This growth model is highly uncompetitive, as shown by the growing deficit in the current account balance, and will not ensure self-sustained growth after 2013, when European Union investment subsidies will be significantly reduced. According to Bank of Greece data, the current account deficit was 28.3 percent higher at the end of July, year-on-year, at 19 billion euros, or 9.1 percent of GDP. It is certain to approach 13 percent of GDP for the year as a whole. The trade deficit reached 23.2 billion euros, up 15.2 percent, as exports rose just 3.5 percent, to 9.7 billion euros and imports were up 11.5 percent at 33 billion euros.