Thursday, December 08, 2011

How Could Greece Approve the 2012 Budget?

My last post was a scathing review of the 2012 budget and its reliance on a big revenue hike to cut the deficit. The post prompted one reader to ask a great question: “How is it possible for a person to find so many obvious problems with the budget plan, just looking at some plots only one day after data on this plan were released, while a whole government [and its] advisors (from inside or outside Greece) who work on this for weeks (?), months (?) do not notice the issues?” This is an excellent question and it deserves a lengthy answer.

Three explanations come to mind. One is that my analysis is wrong. Budgets are based on projections, which are based on qualitative assessments of a very large number of variables. Different people will see different outcomes, and this is especially true in the midst of a deep recession where so many forecasts have proven wrong. What I tried to highlight is my natural skepticism when numbers are projected to deviate significantly from long-term averages. But deviations are possible and do happen – for example, stricter enforcement of tax collection could indeed raise taxes. Even so, I maintain a healthy skepticism for outcomes that are outside historical ranges without adequate justification.

A second explanation is that the government made a politically convenient choice. When a country has a budget deficit, it has two ways to cut it: raise money or cut spending. In Greece, raising money has been politically easier than cutting spending – it is easier to tax everyone a relatively small amount than to cut the livelihood from a smaller number of politically entrenched supporters. A budget that is more heavily weighted towards revenues rather than spending is a budget that sacrifices economic logic for the sake of political expediency. And it is a signal that deep, structural reform is not a serious priority.

A third explanation is that the pendulum is switching too much towards cutting the debt versus reforming the country. I wrote about this danger in March and in September. The idea is this: there is some tension between paying down debt and reforming the country – there are some policies, such as cutting the number of state employees, that do both. But there are also measures – for example selling state land – that may help pay down the debt but not reform the country. And there are some measures that might help reform (streamline the tax system) but that would make debt dynamics worse. For me, the question has always been: if there is tension what do you pick? I have feared that outsiders (the “troika”) would opt for paying down debt, which is not necessarily what is good for Greece. Greece’s real problem is not debt but the political economy that made debt accumulation possible – that is why I had titled my March post “Debt is a symptom, not the disease for Greece.”

The 2012 budget, for example, has a target to raise €6 bn from privatizations. But this is put in the debt reduction bucket. In some sense, that is reasonable – Greece does need to reduce its debt. But in an economy crippled by high taxation that is killing economic activity and prolonging a recession, the country also needs tax relief to allow families to spend again. Cooler minds could have said, let’s put this revenue not towards paying down debt but towards reducing the VAT and other taxes to return money back to people. The same can be said about the debt service reduction that will come as a result of the haircut (€3.1 bn). In a narrow-minded way, it is being used to cut the deficit – but perhaps it could be used to provide tax relief and hence help kick-start the economy rather than allow for another recession in 2012 (-2.8% is the forecast).

Explanation one says the problem is with me; explanations two and three say the problem is with the Greek government. Either way, the signals that this budget conveys are overall negative – negative for the commitment to reform and negative for the ability to craft economy policy that goes beyond “let’s pay down as much debt as quickly as possible.” And that is no way to start 2012.


  1. Is there a Greek election coming up? I've read that it could happen in February but the story is constantly shifting, so I presume that anything is possible.

    If there really is an election coming up then we would have to presume that the budget will be changed when a new government comes in. Then it would be about posturing not about reality.

    If there is no election, then maybe they intend to see it through, but as you correctly point out the numbers don't add up, so maybe they just want to stall and hope that the Merkosy comes up with something.

  2. "sacrifices economic logic for the sake of political expediency."
    That should be Greece's epitaph!

    Regarding selling land. The public is vehemently opposed to land sale. How about leasing land?

    They have waited way too long to start privations, with the current stock prices it is doubtful that they will reach even 6bn. Yet still they wait.

  3. Great post!

    One question:

    "A budget that is more heavily weighted towards revenues rather than spending is a budget that sacrifices economic logic for the sake of political expediency."

    Don't you mean the other way around? I.e. A budget that is more heavily weighted towards [spending] rather than [revenues] is a budget that sacrifices economic logic for the sake of political expediency.


  4. Mike, no. The truly politically difficult choice is to cut spending because that requires cutting off funding from one's political cronies. So if you cut the deficit by cutting spending, you're making the tough choices. If, instead, you merely go after revenues, you're effectively hurting everyone but little. And that's politically easier - at least in a narrow political calculation.


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