1. What are the European fiscal rules and how do they differ from the Stability Pact?
It is essentially a revision of the Stability Pact, always within the context of the EU’s effort for low deficits and low public debt. And all this with specific sanctions for EU member states that do not fulfill the conditions.
The main new element is that the spending rule is introduced to control deficits and public debt in all member countries. Based on the analysis of the sustainability of the debt and the characteristics of each economy separately, the possibility of a certain percentage of increase in spending per year is given. This rule allows the implementation of a counter-cyclical policy, as it provides the possibility of maintaining the annual growth rate of expenditures both in periods of recovery and in periods of economic slowdown. So the new rules allow the Greek government and the other governments of the member countries to keep spending stable even in times when the economy is not doing well. Within the framework of these rules, each country submits a four-year Medium-Term Budget-Structural Program which is approved by Brussels.
2. How will the Greek economy develop in the coming years according to the Medium-term Fiscal-Structural Program 2025-2028?
The medium term reflects the course of the economy over the next four years. As the growth rate will consistently be among the highest in the EU:
-Public debt will be drastically reduced, from 153.7% in 2024 to 133.4% by 2028. This reduction follows the drastic de-escalation of the debt-to-GDP ratio, from 207% in 2020 to 161.9% in 2023, i.e. by 45 percentage points over three years. In 2028 Greece will not be the country with the highest debt in the EU.
-Unemployment will fall further to 8.5% in 2028, from 17.9% in 2019 and 9.5% in August 2024.
-Wages, both the minimum and the average will increase further: The minimum wage from 650 euros in 2019 and 830 euros which is today, is predicted to be 950 euros in 2027. Accordingly, the average salary from 1046 euros in 2019 and 1258 euros at the end of 2023 is predicted to reach 1500 euros in 2027.
The mid-term incorporates the implementation of all the government’s pre-election commitments in 2023 and certifies that the government honors the mandate and trust of the Greek citizens.
3. What leeway do the new fiscal rules leave for the government to increase budget expenditures? Are there scopes for the exercise of social policy?
They exist, mainly due to the fact that the government, with the main argument of the overperformance of the budget in 2024, achieved a greater increase in spending compared to the initial proposals of the Commission.
In summary, spending from €100 billion in 2024 increases by around €3.7 billion in 2025 and 2026 and around €3.2 billion in 2027 and 2028. The increase in spending is broken down as follows:
- About €1 billion per year, on average, is the estimated increase in pensions based on new retirements and the increase based on inflation and GDP.
- Approximately 1 billion euros per year is estimated to be the usual increase in the regular expenses of General Government bodies and Ministries based on the assumed obligations and inflation (operating expenses, annual increase in pharmaceutical and hospital expenses, education expenses, etc.).
- Expenditure on the Armed Forces (equipment programs) is estimated to increase by €0.86 billion in 2025, an additional €0.48 billion in 2026, an additional €0.16 billion in 2027 and remain stable in 2028.
Consequently, there is a budgetary margin of up to 1 billion euros per year, on average, for the implementation of additional policy measures either on the expenditure side or on the revenue side.
4.Given that budget spending cannot increase beyond a certain limit, does the government have other tools to implement its policies?
According to the new rules additional fiscal space for new initiatives is created by the implementation of permanent measures either on the revenue side or on the expenditure side. For our country, in practice, the fiscal space can result from the achievement of the goals for reducing tax evasion and the review of public expenditures (spending review).
In terms of tax evasion, the 1H 2024 collection figures show that, without a tax increase, 10.3% more tax revenue was collected than in 1H 2023, with inflation of around 3%. The additional revenue comes from both the growth of the economy and the reduction of tax evasion by promoting the interconnection of POS with cash registers. For 2027, with the further implementation of the measures to combat tax evasion, an increase in state revenues is estimated at 2.5 billion euros.
In relation to the review of public expenditure, this will be implemented for example by targeting social benefits and unemployment benefits, operational expenditure, expenditure by general government bodies and OTAs, etc.
5. Since any budget overperformance will not be able to be distributed to citizens why is the government seeking higher surpluses?
Budget surplus – which reflects the economy’s surplus – can be used either for debt repayment or for reserve building (or apparently a combination of the two options). In the first case, citizens benefit from the reduction of interest on public debt service. In the second, money is secured to deal with emergencies that may arise in the future.
6. Should the government take additional measures in the coming years in order to achieve the primary surplus targets?
No. The primary surplus target for the whole period to 2028 is 2.4% of GDP (except for 2025 when 2.5% is forecast), which is the primary surplus the economy will achieve this year, according to our forecasts . So no additional measures are needed in the coming years. The Greek economy has proven that it is able (as it is doing this year) to achieve reasonable primary surpluses that ensure the continuation of debt reduction. It is worth noting that with the previous fiscal framework the target for the primary surplus in 2025 would be 4% of GDP, so the new rules favor the country at this point.
7. The change in the method of recording in the debt for the deferred interest from the loans of the second memorandum is discussed. What impact would this have on medium-term assumptions and debt sustainability?
Basically, nothing changes. We are talking about the same debt known to Eurostat, the markets, investors and all Greek citizens. The difference is the distribution of the specific fund over time. That is, if the whole of 2032 will be recorded or if it will be spread over a period from 2012 onwards. In either case, the course of debt reduction, nor the sustainability analysis, nor the financial needs of the Greek government, nor the amount of the permitted expenses are affected. After all, this year the country will prepay loans amounting to approximately 8 billion, which will contribute to the further reduction of the debt.
8. Why does the medium term predict lower growth rates compared to other organizations and international houses?
The medium term is based on a methodology somewhat reminiscent of the one used in bank stress tests. It takes into account worst-case scenarios to ensure that fiscal targets are met in any case. It is indicative that the medium-term scenario predicts a lower growth rate even than the Commission itself! Specifically, it estimates a growth rate of 1.8% in 2025, while according to the Commission’s spring forecasts, growth next year will be 2.3%. So the EU itself appears on this issue with two different assessments, one conservative and one realistic. In addition, there are a number of estimates from domestic and foreign sources (Bank of Greece, EBRD, foreign banks, rating agencies) that approach the realistic scenario.
9. What are the structural changes included in the 4-year budget plan?
These are the changes that concern, among others, the following sectors:
-Demographic: Additional protection for families with 3 children or more, tax deduction for financial benefits in favor of new parents, reduction of insurance premium tax (15%) of private health contracts for children.
-Housing: “My Home 2” program, local restrictions on short-term rentals incentives for long-term rentals of vacant homes.
-Tackling the consequences of the climate crisis: Investments in the prevention of fires and floods, reduction of the ENFIA for home insurance, increase in the perimeter of compulsory business insurance.
-Health: Recruitment of permanent medical and nursing staff, upgrading of hospitals, control of supplies.
– Upgrading the educational system: Non-state universities, renovation of school buildings, vocational education – training programs.
– Limitation of tax evasion: Full implementation of “myDATA” and electronic invoices, digitization of controls, digital AADE. Limiting tax evasion will also allow for further reductions in times.
-Enhancement of entrepreneurship: Incentives for research – development – mergers, establishment of the National Investment Fund, plan for the expansion of greenhouses and support for young farmers.
-Expenditure review for a more rational distribution (Spending review).
10.Ultimately with this Medium Term will the economy go forward or will it be under the pressure of the fiscal rules of Brussels?
The Greek economy is moving forward at the second fastest pace in the EU (Q2 2024 data). This positive course will continue, which will allow the convergence of the Greek economy with the EU average. The most important thing is that a series of positive developments will be combined: the large reduction of debt, the limitation of tax evasion, the coverage of the increased defense spending, strengthening the welfare state, reducing unemployment, reducing taxes and increasing incomes. And this is because a prudent fiscal policy will be applied, as it has been until now, with the parallel promotion of a series of structural changes. Thus, at the end of the four-year period, the government will have fulfilled all of its pre-election commitments. Even more than the commitments regarding unemployment, wages and incomes.
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#SOS #MediumTerm #FiscalStructural
