Wednesday, August 10, 2011

Greece Meets Revised Budget Target in July 2011

In my last post, I noted how the Greek government was missing its budget deficit targets so far in 2011 and how its accumulation of unpaid bills and the reduction in public investment spending meant the target shortfalls were actually understated. Now the Ministry of Finance has released its new budget figures for July and with it the first numbers on the revised targets that take into account the passage of the Medium-Term Strategy. For the first time since January, the budget deficit is lower than targeted.

First off, the 2011 deficit goal is the same: €19.8 bn. But the path to that target has changed. The government has lowered its revenue goal by €1.5 billion and, to maintain the same overall target, plans to slash spending by €563 million and public investment by €953 million. In other words, the is acknowledging the weakness in revenue collection and will compensate for that by cutting spending further – it also seems to be accepting the de facto lowering of the investment budget that I mentioned in my last post.

Second and most important, the revised budget deficit schedule is extremely frontloaded. Of the final target of €19.8 bn, the goal by end July is €16.4 bn – or 83% of the expected end result. The plan shows a modest increase in the deficit in August, and after that the budget deficit should remain flat. This shows the magnitude of the Medium-Term Strategy’s correction: it is basically aimed to allow for a mere 20% increase in the cumulative annual deficit between July and December 2011.

With these revised figures, the actual deficit of €15.5 bn compares favorably with the target of €16.4 bn for July 2011. In fact, it is the first time since January 2011 that the actual deficit is lower than the target. However, that success is chiefly an accounting artifact. And as long as the government continues to accumulate arrears, it will still offer a slightly distorted picture on the extent of the consolidation achieved. And by frontloading the deficit so much, the government’s margin of error has shrank.

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