Eurozone officials showed concern after Athens announced plans to cut taxes and raise welfare spending which could breach commitments made by Greece to its creditors, three sources involved in monitoring the country’s fiscal situation said.
After exiting its third international bailout in August last year, Greece has agreed with eurozone lenders to abide by strict fiscal targets until 2022 in exchange for further financial support.
But ahead of EU elections on May 23-26, and after Greece outperformed its fiscal targets, Prime Minister Alexis Tsipras on Tuesday announced tax cuts and pledged to reinstate a benefit for low income pensioners among other “relief measures.”
The plans “may not be in line with commitments,” one EU source said, adding that EU officials had raised concerns during a regular mission to Athens which ended on Wednesday.
Greece has committed to delivering primary budget surpluses, excluding debt servicing, of 3.5 percent of annual economic output up to 2022.
Under the new plans, the primary surplus target would be cut to 2.5 percent from next year, although Tsipras pledged that 5.5 billion euros will be set aside to guarantee that Greece will meet the higher fiscal target previously agreed with lenders.
“Tsipras’ proposals are just the kind of political-related fiscal relaxation that we have been worried about in our debt sustainability analyses,” a second official said.
The EU statement issued at the end of the mission struck a cautious tone.
“The mission took note of the announcement of new measures, which will be assessed with a view to compliance with agreed fiscal targets and consistency with Greece’s post-program commitments to the Eurogroup,” it said.
The three officials involved in the talks said the assessment was still under way and they could not prejudge its outcome.
Eurozone finance ministers could discuss the issue at their next meeting on May 16, one official said, although the agenda of the meeting has not yet been finalized.
A second official said ministers could wait until June to formally discuss the matter – avoiding addressing the issue before the EU vote.
There is no immediate concern about Greece’s debt sustainability as the country has built a large financial buffer, one official said, “but that does not mean there will be no problem in the long run.”