Greece Macro Monitor (6 October 2016)
Draft 2017 budget, fiscal drag & attainability of medium-term fiscal targets
This report looks at the structure and the underlying assumptions of Greece’s draft budget for 2017, which was released earlier this week. Based on an analysis of its main components, it claims that the programme target for a 0.5% of GDP primary surplus this year remains well within reach, while the respective target for 2017 (+1.75% of GDP) is deemed attainable, conditional on a notable improvement in domestic economic activity in the months and quarters ahead. Implementation risks for the new budget (as well as for the attainability of the 2018 fiscal target) are contained by the fact that a great deal of parametric fiscal measures for the period 2016-2018 (worth c. 3ppts-of-GDP in terms of projected net savings) has been legislated already, as a prior action to the 1st review.
Furthermore, the new programme features significant buffers and a rigid surveillance mechanism to ensure that significant deviations from the aforementioned targets are avoided. However, the real problem resides with what is officially projected for the period after the termination of the current programme in August 2018 i.e., annual primary surpluses as high as 3.5% for a number of years or even decades. Such projections are deemed to be overly optimistic, to say the least. So, what can be done to secure a sustainable fiscal position that would allow for adequate fiscal space to secure a return to sustainable economic growth? In view of the current economic and political realities in the euro area, the solution can be no other than a substantial relaxation of the medium-term fiscal target (3.5% of GDP) in the context of the medium-term debt relief framework that is supposed to be implemented following the successful completion of the present bailout programme.
Our analysis indicates that a relaxation of the medium-term fiscal target to as low as 1.5% of GDP could be accommodated within the general debt relief framework decided at the Eurogroup meetings of May 9 & 24, 2016.
Viewers can log herebelow and read the full report: Greece Macro Monitor_Draft 2017 Budget_6 October 2016
