Greece Sees 2011 Budget Deficit Falling to 7% of GDP, Lower Than Forecast

Greece’s budget deficit will narrow to 7 percent of economic output in 2011, about half of last year’s level, after the government cut spending and raised taxes to secure a European Union-led rescue and avoid default.

The shortfall will decline to 7.8 percent of gross domestic product this year from 13.8 percent in 2009, according to an e- mailed copy of the government’s draft 2011 budget released in Athens today. When it requested the rescue in May, the government forecast a deficit of 8.1 percent this year and 7.6 percent in 2011.

Finance Minister George Papaconstantinou’s budget seeks to offset lagging revenue growth to trim the EU’s second-biggest deficit and allow the country to resume borrowing on the markets. In the first eight months of the year, revenue rose 3.4 percent, trailing the 13.7 percent pace Greece pledged to secure 110 billion euros ($150 billion) in rescue loans from the EU and the International Monetary Fund. Revenue is now seen rising 8.7 percent this year, according to the draft budget.

“The sacrifices of the Greek people are not in vain,” Papaconstantinou said after the Cabinet approved the draft today. “This is yet another big step toward tidying up our public finances and setting the foundation for stable growth.” A final budget will be announced on Nov. 18, he said.

Investors demand a yield premium of 772 basis points to lend to Greece rather than Germany for 10 years, the most of any euro nation. That’s down from a euro-era record of 973 basis points on May 7.

Staying the Course

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 seeks 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.

The government’s new deficit forecasts are “an indication of the great strides that it has made toward getting its public finances on an even keel,” Ben May, an economist at Capital Economics in London, said in a research note today. “But it is still far too early to conclude that the Greek fiscal crisis is anywhere near over.”

Crisis Levy

The spending plan includes 9.2 billion euros of deficit- reduction measures, the equivalent of about 4 percent of GDP. The government’s budget gap next year will fall to 16.3 billion euros from 18.5 billion euros 2010.

Papaconstantinou expects to make 1 billion euros from collecting a crisis levy from companies this year, compared with an initial estimate of 600 million euros in May, according to the plan. A shrinking economy will reduce income from luxury items to 40 million euros from 100 million euros, while a presumptive tax on professionals will bring in 700 million euros compared with an initial estimate of 400 million euros.

Deeper cuts in state spending will bring in 400 million euros, the draft budget showed. The government will also save 300 million euros from a public investment plan, less than a forecast 500 million euros.

Spending on interest payments will mean a 2.2 percent increase in the state budget next year, which doesn’t include spending by local governments, hospitals and other enterprises. Debt-servicing costs will rise to 6.8 percent of GDP next year from 5.6 percent in 2010. Income for the central budget will increase 6.9 percent, according to the plan.

Contracting Economy

The government is speeding up deficit-reduction while the economy is contracting. The budget draft sees the economy shrinking 4 percent this year and 2.6 percent next, in line with previous forecasts. The IMF said in a report in September that higher-than-expected inflation was boosting the nominal value of Greece’s economy, which could help shrink the relative size of the deficit this year and in 2011.

The forecast decline in the 2011 deficit “is based on a projected increase in revenue in the state budget by 6.9 percent and planned decreases in expenditures by 5.9 percent,” the Finance Ministry said in a statement.

Debt is seen rising next year to 330 billion euros, or 142 percent of GDP, from 133 percent, or 313 billion euros, in 2010. According to today’s draft, consumer-price growth will average an annual 4.6 percent this year and 2.2 percent in 2011. The jobless rate will increase to 14.5 percent in 2011, the highest in more than a decade, from 9.5 percent last year.

----With assistance from Natalie Weeks and Christos Ziotis in Athens. Editors: Jeffrey Donovan, Andrew Davis

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net;

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net;

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