GREEK PARLIAMENT ADOPTS 2010 BUDGET: TARGETS AMIBTIOUS, BUT

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SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ECIN EFIN PREL GR
SUBJECT: GREEK PARLIAMENT ADOPTS 2010 BUDGET: TARGETS AMIBTIOUS, BUT
SPECIFICS LACKING

REF: ATHENS 1705

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Summary

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1. (SBU) The Greek budget for 2010, which was passed by Greek
Parliament on December 23, is an attempt to bring order to Greece's
public finances and restore its badly-dented credibility with
foreign investors, international credit ratings agencies, and the
European Union. The budget aims to reduce the country's deficit
from 12.7 percent of GDP in 2009 to 9.1 percent in 2010 through a
series of revenue-enhancing and expenditure-reducing measures. The
government has already promised to aim for a bolder deficit cut to
8.7 percent of GDP, which may be included in the January update of
Greece's 3-year Stability and Growth Plan (SGP).




2. (SBU) Summary Continued. While many analysts believe the 2010
budget targets are probably attainable, the EU and ratings agencies
see the passage of the budget and measures therein as an inadequate
response to Greece's chronic and structural fiscal weaknesses. The
reasons for this include the one-off nature of the measures, a less
than ideal policy mix that relies too heavily on measures where the
payoff is uncertain and negligible in the near-term, and the lack
of vetting with and acceptance by the public, particularly major
labor unions, which have already said they are planning a series of
strikes to protest against planned wage freezes and/or cuts and
pension reforms. These legitimate concerns, however, may mask the
EU's and markets' chief complaint: the GoG's refusal to follow in
the footsteps of Ireland by cutting public sector wages - a step
many see as the holy grail for public sector reform and which could
buy the GoG the time and credibility it needs in the short term in
order to implement longer-term reforms. While most analysts and
the EU are waiting for the GoG to introduce more concrete and
quantifiable measures as part of the updated SGP, it remains to be
seen whether anything short of wage cuts will buy their patience.
END SUMMARY.



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The 2010 Budget

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3. (SBU) On December 23, following five days of sharp exchanges
between the government and opposition parties, Greek Parliament
adopted a crisis budget for 2010 in a bid to bring order to its
chaotic public finances and restore its badly dented credibility
with foreign investors and the European Union. The budget passed
by a healthy majority as the 160 Socialist deputies in power since
October 2009 voted for the budget, while the entire opposition,
from extreme left to extreme right, voted against. The budget aims
at reducing the country's deficit from 12.7 percent of GDP in 2009
to 9.1 percent in 2010. The government has already promised to aim
for bolder measures in order to reduce the deficit to 8.7 percent
of GDP in 2010. This revised target may be included in an updated
3-year stability and growth plan, which will be unveiled next
month. The PASOK government claimed during the debate in
Parliament that the 2010 budget was the nation's "toughest" since
the restoration of democracy in 1974 after seven years of military
rule.



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Revenues

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4. (U) The government plans to increase net ordinary budget
revenues by about 4.5 billion euros or 9 percent over 2009,
following a 4.7 percent contraction over 2008. According to the
GoG, additional revenues will come from the following measures:

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-- 1.2 billion euros from cracking down on tax evasion and settling
taxpayers' overdue debts;



-- 1.5 billion euros from an increase in tobacco, alcohol and real
estate taxes;

-- 1 billion euros from a one-off corporate tax;

-- 865 million euros from the reintroduction of a progressive tax
on large property holdings, inheritances and bequests (in a
separate tax bill, which the GoG plans to table in March);

-- An unknown amount from the abolition of tax exemptions and a
current, flat-rate tax regime for certain professional groups (in
forthcoming tax bill); and

-- An unknown amount from the introduction of capital gains tax and
effective taxation of offshore companies (in forthcoming tax bill).

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Spending

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5. (U) The budget provides for a decrease in ordinary spending of
1.4 billion euros or 2.3 percent over last year, following a growth
of 15.9 percent in spending last year. According to the GoG,
savings from expenditure cuts will come from the following
measures:



-- 2.3 billion euros (or 3.8 percent savings) from a cut to primary
spending (before debt payments);



-- 1.4 billion euros of savings by not repeating one-off 2009
payments to settle state hospital debts;



-- 457 million euros (or a 6.6 percent cut) of savings from defense
spending cuts;



-- A 26 percent fall in ministries' operating costs, such as travel
expenses and power bills; and



-- An unknown amount from a freeze on public sector wages above
2,000 euros a month (civil servants making less than that amount,
however, would receive pay rises above inflation).



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Macro Forecasts

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6. (U) According to the GoG's 2010 budget, GDP is expected to
shrink by 0.3 percent in 2010, a slight improvement over the 1.2
percent drop the GoG expects in 2009.Inflation is forecast at 1.4
percent against 1.2 in 2009, while unemployment will continue to
rise to 9.7 percent in 2010 against 9.0 forecast in 2009. The
budget projects public debt will rise to 120.8 percent of GDP,
compared to 113.4 percent for 2009. The government plans to borrow
up to 53 billion euros (about 22 percent of GDP) in 2010 and
expects to pay out 12.95 billion euros (just over 5 percent of GDP)
in interest payments next year to service the debt.

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The Budget's Key Numbers

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7. (U) The following table represents the top-line targets passed
as part of the budget:



(in pct, euros bln)

2010 2009

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DEFICIT TO GDP (%) 9.1* 12.7

DEFICIT (bln) 22.176 30.557

GDP GROWTH (%) -0.3 -1.2

GDP (bln) 244.233 240.150

PUBLIC INVESTMENT (% y/y) +8.4 -1.3

NET ORDINARY REVENUES (%) +9.0 -4.7

NET ORDINARY REVENUES (bn) 53.700 49.260

ORDINARY SPENDING (%) -2.3 15.9

ORDINARY SPENDING (bln) 69.796 71.438

PUBLIC DEBT (% to GDP) 120.8 113.4

PUBLIC DEBT (bln) 294.950 272.300

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*Following the submission of the budget to Parliament in November,
the GoG announced it would aim to reduce the budget deficit further
to 8.7 percent of GDP next year.



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Further Measures Coming

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8. (SBU) The government has already announced a series of measures
that were not included in the 2010 budget, but which the GoG has
indicated will be included in an updated three-year Stability and
Growth Plan to be submitted to the European Union in mid- to
late-January. These measures, announced by the Prime Minister on
December 14 (see reftel) include: a 10 percent cut in supplemental
public sector wages (which often account for a substantial part of
civil servants' salaries); a hiring freeze for permanent public
sector jobs in 2010, excluding the health and education sectors,
and the hiring on one new civil servant for every five retiring
from 2011 onwards; a one-third reduction of all short-term
employment contracts in the public sector in 2010; a 10 percent
reduction in social security expenditures in 2010 (likely to be
tabled to Parliament in a bill in May); a 50 percent cut in board
members' pay at public enterprises in 2010; managers' pay in
state-run firms will be capped and cut by at least 10 percent; no
bonuses will be paid to managers of state-controlled banks, while
bonuses for private bank managers will be taxed at up to 90
percent. The government has not quantified the savings that would
be achieved through the implementation of these measures.



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Comment

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9. (SBU) Many local and international analysts believe the 2010
budget targets are probably attainable. However, the EU and markets
see the passage of the budget, and measures contained therein, as
an inadequate response to Greece's chronic and structural fiscal
weaknesses. They view the measures as being largely of a one-off
nature, providing little guarantee of fiscal restraint in
subsequent years. The policy mix is less than ideal, with an
overreliance on revenue-raising measures like a clampdown on tax
evasion, which has been the aim of many governments in the past
with no results. Also, cutbacks in spending are not as courageous
as anticipated, and measures such as the public sector hiring
freeze are expected to yield negligible results in the near-term.
Finally, much depends on the degree of public support for the
government's austerity measures. Already, major labor unions have
announced plans for a series of one-day (or longer) strikes to
protest against planned wage cuts and pension reforms.




10. (SBU) The key challenge facing macroeconomic policy at this
time is managing to reverse unfavorable market sentiment toward
Greece, according to the Bank of Greece's (the central bank)
Interim Financial Stability report published the same day
Parliament voted for the budget. Ambitious budget projections and
additional deficit-reducing measures announced by the Prime
Minister to date have not reversed this sentiment. The foremost
reason for this may stem from the GoG's refusal to follow in the
footsteps of Ireland by cutting public sector wages - a step many
see as the holy grail for public sector reform and which could buy
the GoG the time and credibility it needs to implement longer-term
reforms. While most analysts and the EU are waiting for the GoG to
introduce more concrete and quantifiable measures as part of the
updated SGP in January, it remains to be seen whether anything
short of wage cuts will buy their patience. END COMMENT.
Speckhard