ANALYSIS

Policy mix threatens the government

policy-mix-threatens-the-government

It has not been a good time for the government lately but things could get worse if it does not stand steadfast in its choice to honor the agreement reached with the country’s international lenders back in August.

Opinion polls indicate that support for the ruling party is waning and this is bound to put more pressure on some leftist deputies who will be called to vote on some important reforms, such pensions, in the next few months. However, any backtracking could lead to worse economic outcomes by increasing uncertainty and deepening the economic slump.

Usually, it takes 12 to 16 months for a ruling party implementing austerity measures and unpopular reforms to fall behind in opinion polls. It does not seem the leftist SYRIZA party will be an exception, although Premier Alexis Tsipras remains popular. In previous cases, the governments in power reacted by backtracking or slowing down efforts to implement the economic programs. The end result was to lose more ground in the polls and eventually the elections.

Undoubtedly, it is difficult for deputies to vote against what they preached all their life. Some may call it realism. Others, however, may call it unethical, stemming from a desire to stay in power.

Having said that, one may add that such governments are usually re-elected if they act swiftly and pass the painful reforms early in their term to get them over with and reap the benefits later in their term. A number of pundits agree that this is what the coalition government has in mind, but still doubt whether it will be able to deliver with a slim majority of 153 in the 300-seat Parliament.

The government has been trying to seize the initiative on the economic front lately with the privatization of 14 regional airports, the upcoming sale of a majority stake in Piraeus Port and the implementation of the second list of measures to secure the disbursement of 1 billion euros from the ESM. However, other issues such as immigration, the repeal of the so-called “parallel program” to deal with poverty and the bite of new austerity measures have clearly cut into its popular support. A recent poll sees SYRIZA leading the conservative New Democracy (ND) party by just 1 percentage point. Since a fresh leader usually reinvigorates a traditional party, it is reasonable to expect ND to get ahead in the polls in the next two months when the government has to pass new painful reforms in Parliament.

Of course, the government has made things worse sometimes by clinging to its ideology. The 2016 budget is a case in point. The additional fiscal effort to achieve a primary budget surplus of 0.5 percent of GDP amounts to 5.73 billion euros. About 2.53 billion account for expenditure cuts and the rest, about 3.2 billion, are revenue enhancing measures. In reality, the budget is more biased towards revenues since about 1.11 billion euros allocated as spending cuts come from increased health contributions paid by pensioners. The fact that the increased contributions reduce the pensioners’ income does not mean it is an intervention on the spending side.

If the correct allocation is made, the additional measures to enhance revenues amount to 4.3 billion euros in the 2016 budget and about 1.4 billion euros are spending cuts. Recent history teaches that this kind of policy mix, favoring taxes and social contributions over expenditures cuts produces a sub-optimal result in reducing the overall budget deficit and has a greater adverse effect in economic activity. It is not a coincidence that the 2010 and 2011 budgets, which relied more heavily on revenues, missed their targets by a large margin whereas the 2013 and 2014 budgets, which did the opposite, fared better. Even so, the heavy reliance on revenues is indicative of the government’s ideological mark.

We understand the budget does not have the approval of the institutions and the numbers will have to come under the scrutiny of the lenders during the first review of the program. The official budget figures in the first 11 months of the year point to a better outcome than this year’s primary deficit target of 0.25 percent of GDP. However, December is an important month for tax collection and the spending undershooting is already quite large so there is not much room to help offset any misses in revenues. So, it is hard to say whether or not the lenders may demand additional fiscal measures to meet the 2016 primary budget target. The government may be able to avoid any new measures by relying on one-off revenues from fighting tax evasion.

Undoubtedly, the road ahead will be even tougher for the government with pension reform, the taxation of farmers and other important issues pending, as well as the economic climate likely deteriorating. Whether this situation can lead to a new political realignment with more deputies from other opposition parties or even entire political parties joining forces remains to be seen.

In the meantime, history teaches it is better for the government and the country to stay the course, even if it means seeking new political allies, rather than going back and facing marginalization amid economic decay.

[Kathimerini English Edition]