An automatic spending cut mechanism abruptly added to a draft bill loaded with indirect tax increases stipulates “contingency” measures of between 900 million and 3.6 billion euros in case Greece deviates from fiscal targets through 2018.
The contingency mechanism, dubbed the “cutter” by local media and the opposition, will be activated even in case of a small deviation, such as a 0.2-percent primary budget surplus instead of a target of 0.5 percent of GDP.
The amendment that describes the mechanism features four different sets of austerity measures, with activation of one of the four depending on the size of the deviation.
The first set of austerity measures will be activated in case of a projected deviation from the primary budget surplus target of between 0.26 and 0.75 percent, with 900 million euros worth of measures foreseen.
The second set of measures reaches 1.8 billion euros and come if the deviation is between 0.76 and 1.25 percent of GDP. The third set of measures reaches 2.7 billion euros and is implemented in case of deviation of between 1.25 and 1.75 percent, whereas the fourth and most painful set of measures reach 3.6 billion euros and will be activated in cases of deviation from the target of between 1.76 and 2.25 percent of GDP.
The entire “contingency package” of measures and the automatic spending cut mechanism fulfill, almost to the letter, a demand by the IMF that emerged in public last month, and which was loudly rejected by the leftist Greek government at the time.
Fast forward one month on and the mechanism is now included in the omnibus bill set for debate and vote over the weekend. According to the wording in the amendment, the mechanism will hover over Greek fiscal policy until 2020 or 2021.
“The fiscal adjustment measures will remain in force for a time period deemed necessary to ensure that targets for the period of fiscal years 2017-2019, and at least until May 31 of the year following the implementation date.”
The biggest challenge will be 2018 when the Greek government has committed to achieving a 3.5-percent primary budget surplus as a percentage of GDP.
The measure was attached to the tax bill at 1 a.m. on Thursday morning.
