Greece's 2009 Budget Seen as Unrealistic and Out of Context

UNCLAS ATHENS 001655 E.O. 12958: N/A TAGS: ECON GR SUBJECT: Greece's 2009 Budget Seen as Unrealistic and Out of Context with the Global Economic Crisis. -------------- Summary -------------- ¶1. (U) The GoG's draft 2009 budget submitted to Parliament November 21 has been criticized by the press, citizens, opposition parties, and informed observers alike as being unrealistic and out of context with the current economic crisis and resulting slowdown. Although all economic indicators originally included in a pre-draft of the budget presented about two months ago have been revised downwards to reflect the impact of the global economic crisis, the revised projections are far more optimistic than those by informed parties such as the IMF and various independent analysts. The budget projects 2.7 percent growth for the country's GDP in 2009 (versus the IMF's projection of 2 percent) and 7.1 billion euros in additional revenues. The budget projects a drop of the general government deficit to 2.0 percent of GDP in 2009 (versus the IMF's projection of 2.3 percent) from 2.5 percent in 2008 and reduced public debt at 91.4 percent of GDP in 2009 from 93.4 percent in ¶2008. At best, unrealistic targets will mean that the GoG will need to issue revisions during the year. At worst, these targets could undermine the credibility of the GoG's commitment to economics reforms and result in international credit ratings agencies downgrading their outlook for Greece. END SUMMARY. -------------- The Draft 2009 Budget -------------- ¶2. (U) On November 21, Economy and Finance Minister George Alogoskoufis submitted to Parliament the draft 2009 budget. It aims at ensuring satisfactory economic growth, while further reducing the deficit, combating poverty (by funding a National Fund for Social Cohesion, continuing tax reforms, and cutting unemployment and ensuring the viability of the social insurance system. According to its introductory report, the 2009 budget projects that the international economic crisis will continue in 2009 with significant consequences on the Greek economy. All economic indicators originally included in a pr-draft of the budget presented about two months ago have been revised downwards; however, most press and some economic analysts have indicated that the GoG projections are too optimistic considering the uncertain times the global economy is facing. ¶3. (U) Addressing the Greek Parliament soon after the budget's submission, Minister Alogoskoufis admitted that the budget projections may prove too optimistic given the global economic crisis. He also said that the fiscal adjustment program at the center of the GoG's reform efforts, and which constitute one of the main targets of the GoG's economic policy, can only be of secondary importance in relation to the need to help mitigate the impact of the crisis on the real economy. The budget envisages that the Greek economy will grow by 2.7 percent in 2009, down from 3.2 and 4.0 percent in 2008 and 2007, respectively. The inflation rate will slow to 3.0 percent in 2009, from 4.3 percent in 2008 and 2.9 percent in 2007, while private consumption will ease to 2.2 percent from 2.3 percent in 2008 and 3.0 percent in 2007. The unemployment rate is forecast to remain at 7.5 percent, unchanged from 2008 but down from 8.0 percent in 2007. [Note: Greek unemployment figures are often criticized for considerably underestimating Greek unemployment as they do not include jobless people who are going through official state training programs (regardless of whether they find employment) and those who have been unemployed over a year and no longer benefit from unemployed assistance programs. End Note.] ¶4. (U) Regular budget revenues are forecast at 64.2 billion euros in 2009, up 12 percent from 2008 while spending will rise 9.1 percent to almost 66 billion euros in 2009 from 60.45 billion in ¶2008. Expenditures for wages will increase by 6.8 percent in 2009 (versus 8 percent in 2008),and outlays for pensions also will rise at the slower pace of 12.7 percent in 2009 (versus 13.5 percent in 2008). Expenditures for new armaments are projected to drop by 15.2 percent in 2009. The budget projects a drop of the general government deficit to 2.0 percent of GDP in 2009 from 2.5 percent in ¶2008. This will be difficult to achieve during a slowdown. It also projects a drop in public debt to 91.4 percent of GDP in 2009 from 93.4 percent in 2008. To this effect, the budget provides for 7.1 billion additional tax revenues, 13.2 percent up compared to 2008. -------------- Programs to Mitigate Impact of Crisis -------------- ¶5. (U) Despite the government's rhetoric for months that it would take steps to assist low income earners and the unemployed, the draft budget included surprisingly little new social spending. The draft earmarked 350 million euros for the National Fund for Social Cohesion (inaugurated in 2008 with 100 million euros). These figures are below the government's promises of 1.5 billion euros to the Fund for the 2008-2009 period. The Economy Minister attributed the difference to "the dramatic changes since 2007," which did not allow for more spending for the poor. [Note: Late last week, the government announced further details on the 350 million earmarked for the Fund in the draft budget. The GoG said these funds would be used to give special housing loan and heating benefits to pensioners, low-wage earners, and the unemployed. In addition, the GoG announced that it was working on a 2 billion euros package of measures affecting 1 million low income or unemployed citizens. While light on details, the measures are to be funded through a combination of GoG and EU funds and include: (1) 70 million euros for an increase in the holiday benefit for 300,000 people; (2) 310 million euros for an employment program for 60,000 current unemployed beneficiaries; (3) 500 million for a training program for small business to "preserve employment" and improve competitiveness; and (4) 380 million for a program to support getting people back to work and creating job opportunities for those that have to leave school early. The government's announcement of these additional measures is seen as a direct response to criticism that its draft budget did not provide enough support for the most vulnerable. The government is now being criticized for its lack of details on how these new programs will be implemented and for how they impact its draft budget targets. It is not clear how much the GoG will fund (versus the EU),and whether the GoG will amend its draft budget to include these spending programs in 2009. End Note.] -------------- Government Debt -------------- ¶6. (U) The general government debt is expected to reach 237,930 billion euros in 2009 or 91.4 percent of GDP (228,868 billion or 93.1 percent of GDP in 2008). The draft budget indicates the government will borrow 41 billion euros in 2009 in order to finance its budget needs. This estimate is very optimistic considering that the government borrowed 43.4 billion euros in 2008, exceeding the target of last year's budget by 6.4 billion euros, and that the cost of borrowing will be higher next year. Payment of interest on the current debt bill is expected to exceed 12 billion euros in ¶2009. Minister Alogoskoufis said that, due to uncertainty on the cost of borrowing, the borrowing plan for 2009 will be flexible. The government borrowing figures reportedly include the 5 billion euros portion of the State bank aid plan that would be used to inject capital directly into the banking system in exchange for preferred shares for the government. -------------- Comment -------------- ¶7. (U) The press and opposition parties unanimously have criticized the 2009 draft budget as being unrealistic under today's extraordinary circumstances. Some analysts wonder how the Greek government will manage to collect 7.1 billion additional revenues in an environment of low demand and economic slowdown. Minister Alogoskoufis claims that they will come from the "fight against tax evasion," but we believe this argument to be unrealistic judging from the poor results of similar efforts in previous years. (Poor tax collection obliged the Economy Ministry to revise the target for revenue collection down from 54.6 billion euros to 53.8 billion in 2008 as the target in the 2007 budget proved also too optimistic.) While the recent measures to help the most vulnerable should be helpful in mitigating the impact of the crisis, too few details have been made available, and it is not known how these programs will impact the GoG's deficit targets, which are already a stretch in the current environment. Further, instead of boosting investments and domestic demand the budget leaves the public investment program for 2009 at the same level as 2008 (8.8 billion euros). Finally, many view the growth projection of 2.7 percent in 2009 as too optimistic and higher than the projections of international economic entities (Eurostat, UBS, IMF, OECD etc.) of no more than 2 percent (at best) growth for Greece in 2009. Post expects a revision of key targets early in 2009. The current GoG projections could undermine Greece's credibility with investors and ratings agencies and result in a country downgrade. END COMMENT. SPECKHARD