Greek Finance Minister George Papaconstantinou will reveal today how he plans to offset lagging revenue growth in his 2011 budget to trim the European Union’s second-biggest budget gap and allow the country to resume borrowing in bond markets.
Papaconstantinou presents a proposal that seeks to achieve the deficit targets he pledged to the European Union in return for 110 billion euros ($150 billion) of emergency loans needed to avert default, while not extending the two-year recession. In the first eight months, revenue rose 3.4 percent, trailing the 13.7 percent pace Greece pledged to secure the EU-led rescue.
“It’s a very challenging budget,” said Nicholas Magginas, an economist at National Bank of Greece SA, the country’s largest lender. “It is increasingly likely that a less optimistic projection for revenue will be adopted. There will also be pressure to even that out with more spending cuts, which is the certain thing.”
Prime Minister George Papandreou, elected a year ago today, is trying to show investors that Greece can stay the course of a deficit-cutting drive that has slashed wages and pensions and led to street protests. Greece is seeking to return to bond markets next year after investor concerns that the country would default on 300 billion euros of debt led to a surge in borrowing costs and prompted the EU-led rescue.
China a Buyer
Chinese Premier Wen Jiabao said on Oct. 2 that China plans to buy Greek bonds once Greece begins tapping international markets for funding again. China will support the country’s shipping industry, as Greece seeks investment to boost growth and emerge from a second year of recession, Wen said during a visit to Athens.
Greek bonds were Europe’s top performers last quarter, gaining for the first time since the debt crisis began, as the EU said the government has made a strong start to plans to reduce the budget gap to 8.1 percent of gross domestic product this year, from 13.6 percent last year. The EU sees the gap at 7.6 percent next year.
Greek bonds climbed 3.9 percent in the three months through September, the first quarterly gain since Papandreou’s socialist Pasok party came to power and revealed the deficit was twice a previous estimate and four times the EU limit. The revelations sparked the European debt crisis that hurt bonds of other high- deficit countries such as Ireland and Portugal and raised investor concerns about a breakup of Europe’s single currency.
Investors still demand a yield premium of 781 basis points to lend to Greece rather than Germany for 10 years, the most of any euro nation.
Under the May aid agreement with the EU and International Monetary Fund, Papaconstantinou pledged 6.6 billion euros in extra revenue next year and spending cuts of 2.6 billion euros, or about 1 percent of GDP, to meet the deficit goals.
The EU and IMF in September said Greece is on track to meet this year’s deficit target. In the first eight months the central government’s shortfall shrank 32 percent as cuts in wages, pensions, investment and other expenses helped mask the lagging revenue, which was hurt by tax evasion and the shrinking economy.
Papaconstantinou says 2011 income will be bolstered by the full impact of the revenue-raising measures announced this year that included higher sales tax and levies on tobacco and alcohol.
With the economy set to shrink 4 percent this year and 2.6 percent next year, Papaconstantinou doesn’t have a lot of room to raise taxes. He’s already said he’s reconsidering a plan to increase sales taxes next year to raise 1 billion euros because it may hinder growth.
“I wouldn’t risk deepening the recession on further tax hikes,” said Diego Iscaro, at IHS Global Insight in London. “On the spending side, there are many things that should be done that wouldn’t have an impact on activity.”
Greece succeeding in its campaign to curb tax evasion and improve collection, may be key to achieving the deficit- reduction pledges, the IMF said. “The program’s credibility hinges critically on improving tax compliance,” the IMF said in a Sept. 14 report.
Greece has long struggled with collecting taxes and social-security contributions, the largest, permanent source of revenue. Revenue from taxes is among the lowest in the EU at 32.6 percent of GDP compared with the 39.3 percent average among the 27 EU nations, according to a 2009 Eurostat report.
“Further pursuit of fiscal adjustment makes no sense without an effective reduction of tax evasion and the substantive widening of the country’s tax base,” Alpha Bank SA said in a report. “Any lack of progress on this front could endanger the success of the country’s plan to exit the crisis.”
Parliament last week passed a new law to recoup some of the 30 billion euros owed in back taxes by an estimated 1.3 million Greeks, nearly 10 percent of the population. The new measure will impose 10-year sentences for under-reporting income tax and close businesses for 48 hours if they are found to not be issuing receipts.
“We are in need of every euro that will come from this measure,” Papaconstantinou said in parliament on Sept. 29.
To contact the editor responsible for this story: Angela Cullen at email@example.com