Greece is working out its 2019 budget and things are looking up, as the government is on track to both meet its goals as well as incur a surplus. Reports on the state of the budget show how far Greece has come since its time of crisis and its recent official exit of austerity in August. The 2019 budget is the first in a decade that does not subject Greece to a bailout. In its draft submitted to Parliament, Greece’s economy is expected to grow by 2.5 per cent, with both debt and unemployment steadily falling. Greece’s percentage of public debt to GDP is also predicted to fall an additional 13 points.
However, there’s a catch: part of the reforms passed to balance Greece’s budget and avoid austerity mandated that pensions be cut beginning in January of 2018. As the move was deeply unpopular, this particular cut was one of the most difficult reforms for the government to move ahead on.
In September, Prime Minister Alexis Tsipiras announced that Greece will not need to slash pensions or raise taxes in 2019, as the country is beating budget goals set by lenders. The government is urging bailout inspectors to drop their insistence on the pension cuts, which were part of the reforms obligated by the Eurogroup, which gave loans to Greece starting back in 2010.
“These relief measures are the least we can do for a public that has borne huge burdens”, Tsipras said in a news conference last month. “Greece will not return to bailouts again”. This policy was part of a range of tax-relief measures unrolling over the next three years, and also includes reducing corporate and property tax and partial subsidies of social security payment contributions for various workers. “We don’t want to proceed with any backtracking that could scupper fiscal consolidation or the core of necessary reforms”, Tsipiras said, however he insisted that “this measure [on pensions] is not a structural one and is against growth”.
The Greek government estimates that is has enough fiscal leeway to pull back on pension cuts up to 18 per cent while still upholding the healthy surplus needed to keep lenders happy. Under current agreements, Greece must achieve a primary budget surplus of 3.5 per cent of GDP each year until 2022, and Athens reported their expected surplus to reach 4.14 per cent in 2019. 2018 numbers are also expected to surpass the minimum budget surplus, coming in at 3.7 per cent, though final figures won’t be released until the end of the year.
“The primary budget surplus has been better than expected over the last years, reaching 4.2 per cent in 2017 versus a 1.75 per cent demand by the official lenders”, said Carsten Hesse, European economist at Berenberg.
To that end, Greece has actually published not one, but two budgets. One of them contains the reforms previously agreed upon, including pension cuts, while the other does not. This signals that the government is pushing to renegotiate the issue – something that pleases citisens, and should boost Tsipiras in the polls before elections. However, for Greece’s creditors, and those with an eye on the financial markets, this potential change brings anxiety, as backsliding on reforms may make still-recovering Greece more vulnerable to outside shocks. Tsipiras has assuaged these fears, noting that Greece has a multi-billion euro cash buffer that would allow it to ride out volatile periods without tapping the financial markets.
The International Monetary Fund confirms that Greece is on track to meet its budget and its mandated 3.5 per cent surplus, but it doesn’t anticipate seeing a surplus beyond what is obligated until at least 2022. This scenario would hamper the government’s ability to cut taxes and fund pensions to the extent it wishes.
Germany says that the Eurogroup’s final decision on the issue will be made as late as December, after it reviews the report submitted by international creditors on their first post-bailout inspection of the country’s finances. This leaves some time for Greece and the Eurogroup to iron out the kinks in the country’s 2019 budget.
