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Fiscal policy’s dead end

07/07/2003 13:24
Very little done to lower debt; global recovery may make things worse

The recent, limited Cabinet reshuffle has unofficially signaled the beginning of the campaign leading to the next general elections. Given the lax fiscal policies applied by Greek governments in the runup to the elections and the swelling of the central government budget deficit in the first five months of the year, there is good reason to believe things may get worse before they get better. Although most analysts, politicians and others seem to be primarily concerned about economic growth and inflation after 2004, the real threat to the Greek economy may come from another source: the fiscal side.

According to recently published central government figures for the January-May period, the deficit widened by 74.5 percent year-on-year to 6,747 million euros, which compares unfavorably with the 12.7 percent decrease to 5,303 million euros sought in the 2003 budget. The significant drop in EU inflows directed to projects funded by the public investment (PI) budget, one of the two main components of the central government (CG) budget, along with the strong rise in investment outlays by 43.1 percent, helps partly explain the widening of the gap.

Even more important is the contribution of the second component of the CG budget, namely the ordinary budget (OB) deficit, to the significant deterioration in public finances in the first five months. The OB deficit swelled by 89 percent year-on-year to 4,046 million versus an annual target of 485 million euros. This is mainly the result of flat revenue growth and a large increase in expenditures. One-off revenues from the introduction of euro coins and notes in early 2002 boosted revenues last year, making a year-on-year comparison less favorable than it really is this year. Adjusting for this one-off item, revenues should have increased by 4.2 percent in the January-May period, that is close to the annual budget target of 4.9 percent. On the expenditure side, some base effects also played a role since family allowances, other benefits and salary increases to different categories of civil servants which were handed out from July 1, 2002, made a comparison less favorable.