Shrinking economy squeezed

Finance Minister Giorgos Papaconstantinou announced yesterday plans to squeeze 14 billion euros from Greece’s rapidly shrinking economy in 2011, when the country expects to return to the bond markets. Presenting the final draft plan of the 2011 budget, Papaconstantinou said the money would come from higher taxes and spending cuts, including reductions to wages at state companies, in a bid to reduce the budget deficit to 7.4 percent of gross domestic product from 9.4 percent in 2010. «It is a very difficult budget. It will continue on the course set by the 2010 budget,» he told reporters after submitting the draft to Parliament. Last week’s upward revision of the 2009 budget shortfall by the European Union’s statistics service, Eurostat, has forced the government to further tighten its fiscal policy in order to bring the gap to below 3 percent of output by 2014, as stated in the agreement with the EU and International Monetary Fund. The previous 2011 draft budget, prepared last month, had targeted savings and further revenues of 8.2 billion euros. Revenue growth will be supported by a hike in the 11 percent value-added tax rate to 13 percent, while the 5.5 percent VAT figure will be raised to 6.5 percent. In a bid to help sweeten the bitter pill, the ministry will lower the VAT rate on medicines to 6.5 percent, from 11 percent currently, providing some financial relief to heavily indebted pension funds. The tax rate applicable on hotels will also be cut to 6.5 percent from 11 percent to boost one of the economy’s most vital sectors. On the cost side, funding to pension funds will be slashed and pensions will remain frozen. The country’s struggle to tame its massive budget deficit and lower public debt, seen as rising to 153 percent of gross domestic product in 2011 from 143 percent of GDP this year, is becoming increasingly difficult due to to the gloomy economic outlook. Papaconstantinou admitted the economy will shrink by an annual pace of 4.2 percent this year, versus a previous estimate of 4 percent, and that it will contract by 3 percent next year. In a bid to help stem plunging investment activity, the government backtracked on plans to reduce its public investment program, keeping it at 8.5 billion euros in 2011, unchanged from this year. The sooner that Greece returns to the markets, the sooner the economy will return to growth, according to the minister, who reiterated plans to issue bonds in 2011. Greece, which has been shut out of the bond markets since May, had scheduled a return next year but the growing sovereign debt crisis in Europe along with the country’s fiscal problems prompted some experts to forecast that this may not happen until 2012. [email protected] Analyst comments DIEGO ISCARO, IHS GLOBAL INSIGHT «The revision to historical fiscal data, which is having an influence on this year’s figures, has forced the government to alter its targets. However, the new targets are not that far from what we had in the draft budget presented in October and are actually below the target included in the EU-IMF initial draft. «Despite the fact that the revision will make the government miss this year’s target, the fiscal reduction made in 2010 – of around 6 percentage points – has been impressive, especially taking into account that it has been achieved in very challenging economic conditions.» BEN MAY, CAPITAL ECONOMICS «It is a pretty big extra squeeze. That suggests that they stand a reasonable chance of getting the deficit down from 9.4 percent of GDP to 7.4 percent next year, assuming we don’t have further negative surprises about the official deficit figures. It spells bad news for the economy. That additional squeeze means we’re going to see another very bad year in terms of weak economic growth. We think another fall of 4 percent next year is plausible.» (Reuters)