Fiscal policy tightens as growth slows

As Greece starts to feel the pinch from the international credit crisis and rising inflation, the government has decided to clamp down on spending for the remainder of this year and 2009 in an attempt to keep budgetary goals on target. Sources said that in a meeting between Prime Minister Costas Karamanlis and Economy and Finance Minister Giorgos Alogoskoufis last week, it was decided that the conservative government will remain focused on implementing a tight fiscal policy. Greece is aiming to lower its budget deficit to 1.6 percent of gross domestic product (GDP) in 2008 from a 2.8 percent budget deficit last year. The Finance Ministry will keep a tight grip on spending plans for the rest of this year and for the 2009 budget, which it has started to prepare and will make public in October, said a senior government source. However, some aid will be provided for low-income groups ahead of winter, as rising fuel prices have sent heating fuel expenses sharply higher. The benefit will be shared between some 1.7 million people, including low-income pensioners and the long-term unemployed. Greece’s economy is one of the fastest growing in the eurozone, but is likely to slow down more than initially expected this year. The Finance Ministry has set a growth forecast of 3.6 percent for this year, but economists expect it will come in lower, between 3.0 and 3.5 percent. The negative impact from the international credit crisis and rising inflation is expected to run into 2009 and perhaps even 2010. Inflation is also seen overshooting the government’s target of 3.5 percent year-on-year for 2008, settling above the 4 percent mark, according to experts. Consumer prices rose almost 5 percent last month, remaining at a 10-year high. The tight fiscal policy is also seen as helping to offset a drop in budget revenues. Greek budget revenues in the first six months of the year rose 5.7 percent, falling well short of the targeted 12.1 percent annual growth rate. Figures from the Finance Ministry show that revenues in the January-to-June period rose by 1.33 billion euros to 24.8 billion euros.