The Greek economy will remain under huge pressure throughout 2008, which is forcing the Economy and Finance Ministry to review its forecasts of inflation and growth, while also making its efforts toward a restrictive incomes policy even harder and threatening to derail budget targets. The ministry’s original projection of 2.8 percent inflation, on which the budget and incomes policy was based, is history after recent global and domestic developments. For the time being, only Finance Minister Giorgos Alogoskoufis is insisting on this target in order to contain the salary demands of employees in the public as well as private sector. The Bank of Greece is now forecasting inflation of 3.4 percent and this is actually quite optimistic, according to several observers. EFG Eurobank group’s financial consultant Gikas Hardouvelis expects inflation to reach 3.7-3.8 percent for the whole of the year, as in the first half of 2008 it will continue to stay above 4 percent or even higher. The Financial Reports director of the Alpha Bank group, Michalis Masourakis, also expects inflation to close at 3.8 percent at the end of the year, provided international oil prices do not change significantly. Sources at the Finance Ministry suggest that it has already started revising its inflation forecast upward, mainly in light of soaring oil prices across world markets. The average price of Brent so far in the first quarter of the year has reached -65 per barrel, which is a massive 16.54 percent higher than the estimated price on which the Greek budget had been based (-55.5 per barrel). Oil hikes alone are enough to take the ministry forecasts for inflation above 3 percent for 2008. Inflation developments create serious problems in the implementation of the government’s economic policy, particularly regarding salary increases, as the Economy Ministry will find it hard to convince workers and pensioners to accept rises of 3 to 3.5 percent in salaries and 4 percent in pensions, as envisaged in the 2008 budget. However, the fiscal margins for further increases are particularly limited, as budget spending on salaries and pensions has already increased due to pre-election promises given to specific worker categories, such as police and firefighters. Despite the tight incomes policy planned by the ministry, expenditure on salaries and pensions will increase this year by 8.9 percent compared to last year. To increase the attractiveness of the small nominal rises, in all the scenarios examined by the State General Accounting Office, there are thoughts of gradually incorporating a performance incentive in the basic salary, which will be completed within three to five years. This will be automatically passed on to state pensioners too. Besides the fiscal side effects, ministry sources argue that the more generous the incomes policy, the greater the risk of making the imported – and mostly temporary inflationary pressures – a permanent fixture of the Greek economy. The revision will likely be announced after the European Commission’s spring forecasts at the end of April. Growth Another imminent revision concerns the decline of the growth rate. Officials within the Economy Ministry admit that given international developments, the alternative scenario of the Stability Program that provided for a growth rate of 3.8 percent is now closer to reality than the main scenario which was based on a 4 percent growth rate. Already the first worrying indications on growth have been recorded from the final quarter of last year. The growth rate of Gross Domestic Product (GDP) came to 3.6 percent, and on average in 2007 closed at a rate of 4 percent (from 4.1 percent estimated in December). The Bank of Greece expects growth of 3.7 percent this year, while the estimate of Alpha Bank is 3.8 percent. This downward revision of growth makes more difficult the attainment of the revenue target and therefore the entire execution of the state budget. Nevertheless, even if there is a revenue shortfall due to lower growth, the government does not have the luxury to resort to an increase in indirect taxes such as value-added tax, not just because the political cost would be too high, but also because it would raise inflation.