Wednesday, 31 October 2012

Greece Announces Massive Budget Cuts

Greece will cut 1.7 billion euro from state salaries and 2.8 billion euro from pensions as part of a total public spending curtailment of 10.8 billion euro next year.

The two cuts are among the most controversial included in a final draft of next year’s budget, released today by the Greek finance ministry, because they contradict a declaration issued by the coalition shortly after it was elected in June to try not to touch incomes. “The fiscal target can be achieved without further cutting salaries and pensions… but by reining in waste and targeting corruption,” the text read.

Greece today also submitted a plan of how it would extend its period of fiscal adjustment by two years to 2016. The debt-ridden country is obliged under its current loan agreements to balance its budget by 2014. Greece’s finance minister, Yannis Stournaras, has said that the country’s debtors have agreed to extend that to 2016. The assertion was denied by his German counterpart.

If it were approved, the so called Mid-Term Fiscal Strategy would see Greece register a final budget deficit of 1.8 billion euro in 2016 (see table at the end of this article). Its deficit this year is expected to be about seven billion euro. If the extension were not approved, Stournaras has said, the two-year austerity programme would have to be closer to 18bn euro.

But such arguments are unlikely to carry a lot of weight with the political opposition. The radical left Syriza party has been arguing that Greece’s bailout, sponsored by the European Commission, European Central Bank and the International Monetary Fund will ultimately fail because it produces recession. 

The Greek economy will shrink for the fourth year this year by an estimated 6.6 percent, and next year by an estimated 4.5 percent, losing a total of about a fifth of its 2008 size. One in four workers is already unemployed, and that figure is expected to rise.

The knock-on effect of recession has been a drop in state tax revenues. The government expects to make 2.6 billion euro less from taxation next year compared to 2012.

The government controls 176 seats in the 300-seat legislature, comfortably more than the 151 needed to vote the budget and austerity bill through. But a 3.3 billion euro package of last-minute spending cuts to the 2012 budget voted parliament through in February witnessed about three dozen defections and massive riots on Syntagma Square before parliament. 

The tensions underlying Greek society and disagreement on how to handle them have caused friction between the coalition leader, the conservative New Democracy, and its junior partners, the socialist Pasok and the Democratic Left. A number of socialist MPs is rumoured to be planning to veto the measures, while the Democratic Left has yet to officially sign onto the package in its entirety.

“The coalition parties’ back-and-forth on the measures have no purpose other than to save face as the government heads for collapse,” said Syriza’s leader, Alexis Tsipras, on Monday.

Yesterday Prime Minister Antonis Samaras said Greece had reached the best deal possible with its creditors. “We did everything possible… We won significant concessions even at the last minute,” Samaras said in a statement. “If this agreement and budget are approved, Greece will remain in the euro. And it will emerge from the crisis.” 

A vote for the budget and austerity package will release a loan tranche of about 31 billion euro Greece needs to remain solvent after November.
How Greece Sees Its Deficit (in billions of euro)*


*Source: Greek Finance Ministry, October 31 2012

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