Latest Greek 'model': Exceeding fiscal targets amid an under-performing economy

Monday, 26 November 2018 19:05
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By Vassilis Kostoulas

Increased concern that the Tsipras government's "over-performance" in terms of meeting creditor-mandated annual primary budget surpluses is asphyxiating the "real economy", and impeding a genuine recovery in Greece, emerged anew last week with the tabling of the 2019 draft budget.

On the one hand, institutional creditors reasonably maintain that ambitious annual fiscal targets are necessary to service and ensure the sustainability of a high external debt racked up by Greece through three successive bailout packages. On the other hand, the poll-trailing leftist-rightist government wants to again dole out an end-of-year "social dividend" to specific socio-economic groups, also in hopes that the extra welfare spending will translates into votes at the ballot box.

The primary budget surplus, as a percentage of GDP, for the first 10 months of 2019 was almost double the target (6.4 billion euros compared to the goal of 3.5 billion euros, according to the provisional data of the implementation of the budget). Moreover, the over-performance over much of 2019 isn’t the first time that fiscal targets have been surpassed.

In fact, the primary budget surplus has been surpassed for the last three years, in large part due to a “tax tsunami” imposed in 2016, a sluggish covering of the state’s arrears to the private sector and a “scrimping” on public investment expenditures.

The problem, as most mainstream economists will point out, is that all three of aforementioned parameters dilute efforts to boost GDP and generate a genuine economic recovery after nine years of recession.

Conversely, the counter argument is that excess budget surpluses, to some degree, emanate from missed forecasts regarding the performance of fiscal measures in the third memorandum bailout. At the same time, meeting and exceeding fiscal targets works towards restoring the country’s credibility abroad.

According to the last bulletin by the country’s debt management organization, the Greek state owes a hefty 365 billion euros. To ensure that the debt remains sustainable, creditors demanded, and the current Greek government acquiesced to, a 3.5 percent primary budget surplus, as a percentage of GDP, from 2018 to 2022; easing to 2.2 percent from 2023, but extending to far-off 2060.

What has caused “heads to turn”, however, both inside the Eurozone and beyond, is the fact that Athens has “easily” exceeded the annual fiscal target.

In 2016, in fact, the Greek state exceeded that year’s fiscal target eight-fold, reaching the highest primary budget surplus figure in 22 years. In absolute terms, the coalition government was obliged to post a 0.5-percent primary budget surplus for 2016, and end up with 3.9 percent.

One of the ironies that has emerged on Greece’s political stage, however, is that when it was in the opposition – prior to 2015 – the current ruling party, hard left SYRIZA, vilified whatever modest primary budget surpluses by the previous ND-PASOK coalition government as “blood-soaked”.

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