Follow by Email

Saturday, November 25, 2017

Parliament's Budget Office Surprises!

When the head of Parliament's independent Budget Office states publicly that the social dividend planned by the SYRIZA government is counter-productive to much needed economic growth in the country, that should raise some eyebrows.

Several years ago, when it first became apparent that, some day in the foreseeable future, Greece might have a primary surplus again, I had made several suggestions as to what the primary surplus should be sued for ("Beware of the primary surplus!").

The first phase in a financial rescue is generally a phase where a borrower still needs fresh money in order to stay in business. Corrective measures have already been taken but it will still take a while until they show results. During this phase, the country still runs a primary deficit even though substantial reforms have already been made. That phase lasted in Greece until about 2013.

Phase II is where the deficit gradually turns into a surplus, initially rather small but growing steadily. However, doubts still remain whether that surplus can be sustained over time. What happens to the surplus during this time is of crucial importance.

Phase III is where everything is back to normal.

Greece now seems to be reaching the peak of phase II: from January-September 2017, the general government accounts registered a consolidated primary surplus of 5,3 BEUR, roughly the same as the year before and, according to the government, substantially above the target. It seems rather likely that, for the year as a whole, Greece's primary surplus will exceed 6 BEUR.

That is a sensitive number because Greece's creditors will undoubtedly remember that Greece's interest expense is currently running at about 5,5 BEUR annually (at current, subsidized interest rates). Put differently, Greece - for the first time since the crisis - could pay ALL of its interest out of the primary surplus this year. One would expect that creditors will put pressure on that.

However, Greece is still in phase II and the crucial question is how the primary surplus can best be applied in order to promote sustainable growth. Paying interest is certainly not conducive to promoting domestic growth. Will the social dividend be?

Without having any special insights into the subject matter, I would tend to agree with the Budget Office. A social dividend is generally for one-time consumption and that is it. The thought comes to mind that the Greek state owes substantial monies to domestic economic agents (unpaid bills, non-refunded taxes, etc.).

One would think that if the Greek state used a billion or two of its surplus to pay past-due bills with a special focus on small and medium sized businesses, that ought to have an extremely beneficial effect on the economy. That should also be in the interest of foreign creditors and domestic lenders because when small and medium sized businesses improve their performance, lending risks also decline.

One wonders why, with such huge monies flowing into Greece, why the state would have such high arrears in the first place. I seem to recall that parts of recent tranches were explicitly earmarked for the purpose of reducing arrears but the numbers don't show that this has happened.

2 comments:

  1. " One wonders why, with such huge monies flowing into Greece, why the state would have such high arrears in the first place. I seem to recall that parts of recent tranches were explicitly earmarked for the purpose of reducing arrears but the numbers don't show that this has happened. "

    There is nothing to wonder about, Herr Kleingut,

    The "social dividend" handout buys votes for the SYRIZA / ANEL Front. Tsipras will remind voters in the next general elections of all his "social" handouts and ask for their vote. He got a good chance to fool them again.

    By the way, the primary surpluses are the results of
    1/ excessive taxation,
    2/ accumulation of arrears to State suppliers and
    3/ the (almost complete) elimination of the State's investment budget.

    None of the above 1 - 3 is supportive of the economy, but that is not the concern of this government.

    ReplyDelete
  2. They still think they can re-distribute themselves out of the slump, not having noticed that the grants and loans have been reduced to a trickle of what it was.
    One year ago, in the budget forecast for 2017:
    -Growth was estimated at 2.7%, it looks more like 1.6% now, they predict 2.5% for 2018.
    -Investment should rise by 9.1%, it looks more like 5.1%, they predict 11.4% for 2018.
    -Private consumption up by 1.8%, it looks more like 0.9%, they predict 1.2% for 2018.
    Privatizations, that should contribute billions, have practically ceased. They are simply "starving the beast" until they reach an equilibrium when private savings have been depleted.
    Of cause it would have been better if they paid some of their private creditors, but most of them are traders, just re-circulating the money and adding a percentage, it's still no substitute for FDI to increase real production.
    Lennard.

    ReplyDelete