Greek 2020 draft budget 'compliant' with Stability and Growth Pact

The EU's executive body also adopted the fourth Enhanced Surveillance Report on Greece in the framework of the post-programme monitoring of the country. In the report, the Commission said has prepared a budget for 2020 that meets the agreed primary surplus target of 3.5 pct of GDP in a growth-friendly manner, and that the government has overall taken the necessary actions to achieve its specific reform commitments for mid-2019, in the context of advancing a broader reform agenda. Further actions will be crucial to complete, and where necessary accelerate, reforms, it added.

The conclusions of the Commission's report will be discussed at the December 4 Eurogroup meeting, along with a proposal to activate the next package of debt relief measures with the return to Greece of ANFAs and SMPs.

EU Commission says Greece to achieve agreed fiscal targets
Economic growth slowed in the first half of the year but is expected to remain resilient, against the headwinds of a weaker external environment. The ongoing recovery is likely to be supported by gains in export market shares and fiscal policy measures aiming to stimulate investment and reduce labour costs. The general government balance is projected to record a surplus in 2019 for the fourth year in a row, which should facilitate a rapid reduction in public debt. Greece is projected to achieve its agreed fiscal targets, while at the same time improving the quality of its public finances, the European Commission said in its autumn economic forecast report released on Wednesday.

Real GDP growth decreased in the first half of 2019 to 1.5 pct (y-o-y). The lacklustre performance of growth in the first quarter (1.1 pct y-o-y) was due to a decrease in net exports as well as a decline in government consumption. These were partly reversed in the second quarter (1.9 pct) but headline growth remained below the 2018 average. Despite higher disposable incomes through improving labour market conditions, private consumption declined by -0.1 pct (y-o-y) in the first half of 2019. In light of strong improvements in business and consumer confidence during the summer, consumption is expected to accelerate in the second half of 2019. 

The subdued outlook for the euro area economy is set to dampen export growth, though this effect is likely to be cushioned somewhat by the solid market share gains being made by Greek exports. In addition, the shift in the composition of tax revenues towards less distortionary taxes accompanied by social policy measures, is expected to support investment and employment growth.

Against this background, GDP growth is projected to strengthen to 2.3 pct in 2020 before easing to 2.0 pct in 2021. Employment growth is expected to remain above 2 pct in 2019 and 2020 and to slowly moderate thereafter, bringing the unemployment rate to 14 pct in 2021. Inflation has been revised down to 0.5 pct in 2019 due to the impact of the VAT reduction in the second quarter as well as the lower-than-expected rise in oil prices. In 2020 and 2021, inflation is expected to increase to 0.6 pct and 0.9 pct, respectively, in line with the ongoing recovery and inflationary pressure from the tax reforms.

Downside risks to the outlook stem from a slowdown in foreign demand, as well as a persistent under-execution of the budget targeted for public investment. Upside risks are related to the marked improvement in business and consumer sentiment, which has yet to be translated into significant increases in spending. Improved access to finance and bank lending would also provide further upside lift to growth which facilitates the achievement of fiscal targets Greece’s headline budget balance is forecast to record a surplus of 1.3 pct of GDP in 2019, which would mark its fourth year in a row in surplus.

This forecast is supported by favourable revenue collection, on the back of strong growth in disposable incomes as well as a reduction in the spending ceilings, which have helped to accommodate permanent measures worth 0.7 pct of GDP adopted in spring 2019. The primary surplus monitored under enhanced surveillance is now projected to reach 3.8 pct of GDP in 2019. 

Greece will be covered from the contingency reserve and no additional package of social spending will be paid on top of the current plans because it was not announced with a sufficient level of detail. The forecast for 2020 incorporates planned cuts in distortionary taxes and a limited increase in family-oriented social benefits. The package (worth 0.6 pct of GDP) includes a 4 percentage points reduction in the corporate income tax, a reform of personal income taxation that introduces a new rate of nine percent for the lowest incomes, and a reduction in social security contributions for full-time employees. The package is accompanied by measures ensuring fiscal neutrality, supporting a higher collection of indirect taxes and revisions in spending ceilings. Overall, Greece is expected to achieve its primary surplus targets in 2020 and 2021.

The fiscal outlook also reflects the recent Court ruling on the 2016 pension reform and the authorities’ commitment to accommodate the possible fiscal impact of the follow-up legislation within the agreed spending ceilings of the Ministry of Labour.

However, the forecast remains subject to uncertainty in view of another Court case on pensions that is still ongoing, while additional pressure could arise from past policy initiatives affecting the public wage bill and the increasing number of temporary personnel. The upside risks from overstated budget ceilings have somewhat diminished but remain substantial. The headline balance is forecast to deteriorate by 0.3 percentage points of GDP in 2020 and slightly improve in 2021. The projected decrease in 2020 is driven by the payment of the first tranche of the contingent debt-relief measures in 2019 and the expected decrease in the primary surplus in 2020.

In view of the projected narrowing of the output gap, the structural balance is projected to gradually decline over the forecast horizon, reaching about 1.2 pct of GDP in 2021. Greece’s public debt-to-GDP ratio is expected to fall significantly from 181.2 pct in 2018 to 163.1 pct in 2021.