Friday, September 28, 2012

Greek Arithmetic

In my last post, I wrote that Greece has not really practiced austerity. This surprised people. Well, here are some more numbers. If you wonder “what the hell does the troika want from us,” the following table should answer your question.

The top line shows primary government expenditure (data from Eurostat), which covers what the state spends on salaries, benefits, goods and services and investment (but excludes interest). In 2011, primary spending was €92.7 billion, which is €20 billion below the 2009 level. So in a two-year period, the Greek government has cut an enormous amount of spending. If you only look at that number, it seems that Greece has in fact practiced a lot of austerity.

But notice what happened between 2006 and 2009: spending rose by €28.1 billion! In other words, the cuts of 2010 and 2011 barely serve to offset the massive increases of 2007, 2008 and 2009. In fact, as a share of GDP, the amount of spending in 2011 was higher than in 2007 (43.1% versus 42.8%) and much higher than in 2006 (40.5%). Even after cutting €20 billion between 2009 and 2011, the Greek state spent 3.4 percentage points of GDP more than it did in the period from 2000 to 2005. Why?

The first line shows government wages. Here, we see a similar story to the top line number. Between 2009 and 2011, the government cut almost €5 billion in spending. But on an absolute basis, the spending of €26 billion is higher than the spending of €25.5 billion in 2007 and as a share of GDP, government employees took in more than in 2008, before the cuts started. Compared with normal levels in 2000-2005, spending on wages was 1.1 percentage points higher. So yes, the government has made a tremendous effort between 2009 and 2011, but this is not enough to even offset the increase of 2006 to 2009, much less revert spending back to its 2000-2005 levels.

Next comes spending on social benefits, which is mostly health and social protection. Here the reduction is even smaller. Between 2009 and 2011, the government cut €1.9 billion in spending. But from 2006 to 2009, spending rose by €13.3 billion; of that raise, 56% came from higher spending on pensions, 23% from higher spending on health and the rest from other benefits (chiefly sickness, disability, family, unemployment). Relative to GDP, the “welfare state” spends even more than it did in 2009 and it spends 6.3 percentage points more than 2000-2005!

Wages and social benefits made up 79% of primary government spending in 2011 so that’s why they deserve special attention. But their share of total spending was around 67% to 70% from 2000 to 2009, which means that they have declined at a much smaller pace than other spending. In other words, the drop in other spending is disproportionately high to compensate for the modest decline in spending for wages and social services. From the rest of the table, I want to highlight two items.

The first is the drop in the purchase of goods and services. Unfortunately, Eurostat does not have yet detailed information for 2011, but the Budget Bulletins of the Ministry of Finance show that spending on weapons went from €2.4 billion in 2007 to €360 million in 2011, which means that more than a third of the change between 2007 and 2011 in “goods and services” came from reduced spending on defense systems.

The second item to highlight is capital spending. This is mostly the public investment budget and this has been cut severely during the crisis. Here again we need to look at the data from the Ministry of Finance to get a clearer picture of the trends. From 2009 to 2011, the Public Investment Budget declined by €3 billion, which accounts for almost two-thirds of the drop in capital spending. The drop came mainly from reduced spending in transportation, industry and regional development.

These numbers reveal the following. First, the Greek government is cutting spending, but the reductions have yet to make up for the increase from 2006 to 2009, much less to bring the state back to where it was in 2000-2005. Second, the government is cutting spending in defense, infrastructure and development because it cannot reduce wages and benefits quickly enough. And third, tax increases (which I am not covering in this post) are in place to finance the very slow retraction of a state that expanded spending so massively from 2006 to 2009.

The last thing to point out is this. The Greek recession started in Q4 2008 but things really got worse in 2009, when GDP fell by 3.3%. Yet (primary) government spending rose 11.2% in 2008 and 6.3% in 2009. The reason this is important is that there are people out there who seem to think that the recession is due to cuts in government spending and who prescribe more government spending to get out of the recession. But government spending was rising quite rapidly while the economy was shrinking! In fact, when government spending declined by 10.5% in 2010, the economy contracted by just the same amount as it did in 2009 when government spending was rising.

A devout Keynesian (probably not Keynes himself) would say that the increases in government spending were not enough to offset the drop in private activity. But within a three-year period, from 2006 to 2009, state spending as a share of GDP rose by a fifth – Greece had 20% more state in 2009 than in 2006. How can that not be enough? Where was that state? Were the services that the state offered to the Greek citizen 20% better in 2009 relative to 2006? What exactly did that massive increase in spending accomplish besides enrich the people who work in the government and who receive social benefits? What did the taxpayer who was honest then and is honest now get in return? And how is spending more on wages and social benefits as a share of GDP versus 2000-2005 starving “public administration” or crippling the “welfare state?”

These are serious questions. People who are enraged at the corrupt elite should also ask their fellow co-protestors how much money they make relative to 2006 and what they have done to deserve this rise in compensation or benefits. There is plenty of blame to go around but the ideas that the state is either starved or that the solution rests with more “counter-cyclical” government spending are absurd. As Bill Clinton put it recently: Arithmetic, people.


  1. Great post - no wonder some pseudo-Keynesians in greece (like Baroufakis) never use numbers to support their arguments.

  2. You don't seem to take into account the fact that GDP has also changed in these years.

    1. To get share of GDP, I divide by each year's GDP - and since the economy is smaller today than it was in 2006, the same amount of money amounts to a higher GDP share.

    2. Which explains WHY 'relative to GDP, the “welfare state” spends even more than it did in 2009 and it spends 6.3 percentage points more than 2000-2005'. It does not spend MORE, it appears more because the drop in GDP is substantial.

      And as I repeatedely mentioned to you in other comments pensions in Greece are based on CONTRIBUTIONS - it is not 'state expenditure' because it is not the state's moneys - it is the moneys of employers and employees (which the state and the Greek banks have been looting for at least 5 decades).

      The fact that the Greek state likes to present the spending of moneys that are not its own as STATE expenditure it is another story and has to do with the ridiculous statistics that it keeps and the ridiculous external 'authorities' (e.g. EUROSTAT) that accept such practices.

      Apart from some corruption-related over-spending in the Health sector all other social expenditure in Greece is

      - either in par with other EU countries that face ageing populations who contributed towards their pensions (e.g. pensions)
      - or very low (child benefits, unemployment)
      - or non-existent (social assistance, minimum income)

      So please stop reproducing the myth that the residual Greek 'welfare state' had anything serious to do with the crisis.

      It did not.

    3. Problem is that this logic does *not* explain why the deficit grew... if all this expenditure was covered by contributions...

    4. Niko, this is the story of the looting of the Greek social security funds by the Greek state and the greek banks. I hope this will help you change your mind. all the above are facts - I know them due to my professional expertise.

      1. 50- The State OBLIDGES them to deposit contributions (by employers and employees) to accounts BEARING NO INTEREST in the Bank of Greece - Mε τον αναγκαστικό νόμο Ν. 1611/50 με πρωθυπουργούς τούς Ιωάννη Θεοτόκη (υπηρεσιακός πρωθυπουργός), Σοφοκλή Βενιζέλο, και Νικόλαο Πλαστήρα, τα Ασφαλιστικά ταμεία έχασαν το δικαίωμά τους να καταθέτουν τα αποθεματικά τους στίς εμπορικές Τράπεζες και να κερδίζουν τούς τόκους των κεφαλαίων των αποθεματικών τους. - The Greek banks find cheap capital to lend WITH INTEREST to the economy.

      1970s - The social secuirty system begans to 'mature', i.e. the first pensioners begin drawing pensions based on their RIGHT to a pension established due to teh fact that they contributed to the system.

      1980s - with inflation running high and their reserves in NON-INTEREST accounts the social security funds begin to run in deficit. PASOK-run state in collusion with the Greek bank(sters) OBLIDGES the social security funds to BORROW with INTEREST from commercial banks to cover their liabilities/obligations to pensioners. Their deficits BALLOON, so the PASOK-run state in collusion with the Greek bank(sters) decides to COVER the defricit with TAX-PAYERS moneys. The Greek people are being ROBBED TWICE, as contributors and tax-payers. The Greek banks(ters) are laughing all the way to ...their banks!

      1990s-mid 2000 The Greek state (of all governments) attempts various 'reforms' that aim to cope with the crisis by merging relatively better-off fudns with the ones that are in crisis (created by the Greek state). The 'system' is in a mess

      mid-200: 'structured bonds' scandals - further looting of the funds via stock exchaneg scams sanctioned by the Greek state

      2012 - haircut - the TOTAL destrcution of any reserves left, initiated by the Greek state in collusion with Greek and forteign bank(sters). A few years agon the funds and otehr public organisations are OBLIDGED to palce any remining moneys in a joint account in the Bank of Greece and buy at 100% value GReek bonds (already collapsing in value in the secondary market).

      These for starters. Check your facts and story.

      Greece never had a serious problem with social security - really.

      It had a problem with its political elite and the banksters that payrolled them. The same people who put the country into EURO against the interest of the real economy and the Greek people's welfare.

    5. Anonymous, thank you for this - but I am still not sure what "facts" and "story" I am supposed to check after having read this. My point is that spending, especially on social benefits, rose dramatically between 2007-2009; that it was unmatched by a rise in revenues, which is why the deficit ballooned; and that the cuts that have been implemented as part of the "austerity" are no where near enough to bring benefit-spending back to its 2006 levels. Those facts contradict the sense that one gets that the welfare state is bring starved. I have no trouble blaming politicians and bankers and others; but I don't see how what you write above in any way changes a very simple and straightforward story.

    6. first of all unless we have some serious decomposition of what is inlcuded under 'social benefits' we cannot claim that 'the welfare state is bring starved' or not.

      Eurostat stats are not the most reliable (let alone the Greek stats) and I have seen many times in the past fugures changing retropsectively or not making sense.

      Nevertheless. let's assume that everything is perfect.

      a) The greek state 'social expenditute' data comprise 3 basic items - pensions (the biggest), health exp.(the second biggest), everything else (family benefits etc. which was always next to nothing)

      The 3rd part is laughable ny any international comparisons so we will ignore it. Greece never had a serious welfare state in this respect. There was no serious increases there.

      So, any increases must have come eitehr form pensions or health.

      Now, in terms of pensions, there may have been a rise in the number of pensioners due to 2 facts. 1) ageing population and 2) early retirement. The latter is probable if one considers that various reforms during that period were going to penalise ealry retirment and people of pensionable age decided to exit as quickly as possible to avoid been 'caught' by the new punitive measures.

      In terms of health expenditure, that's anotehr story. For years there was a HUGE PARTY at the expense of the Greek tax payer and the Greek contributor that involved multinational pharmaceutical companies bribing health professionals (doctors, nurses) and charging the Greek state and greek social security funds (health sections) enormnous amounts of money for products that in other countries' systems were charged at a fraction of what were chanrged in Greece. For these scandals there were recently court cases in the US fining millions of dollars well known pharmaceuticals. In Greece of course nobody was touched. These were not moneys that went to health or the patients but lined the pockets of political patrons and health profs.

      Finally, IF, under 'social benefits', Eurostat includes expenditures that the Greek social security funds did (like the FORCED buying of Greek state's bonds at 100% of their value) then I am surprised that the stats are not even higher.

      In any case, whatever expenditure goes towards pensions is ususally towards people who have established their RIGHT to a pension because they paid contributions for the set period of years that the law described. They are un-elastic.

      It is the contributions side and the of return on investement of the contribution-based reserves that is the BIG issue.

      The bottom line is that the welfare 'state' in Greece IS starved. Greek pensioners have been robbed their pensions and the Greek state and banks have been looting them for decades.

      Any increase in exp. is either due to legitimate claims or due to corrupt practices. In any case, the THESIS that the Greek 'welfare' state contributed to the deficit or the crisis has no basis.

    7. Population aging between 2006 and 2009? Seriously? To explain a 25% increase in spending?

      Look, just because you put something in CAPS or you say it emphatically does not make it true. You may not like Eurostat or national statistics; fine. Problem is that's all we got - that's how we know the Greek state doesn't have enough money to pay the bills and needs to borrow. IF all these numbers are fake, we shouldn't need the IMF - we should not have had a 15.6% budget deficit in 2009. We should have had no need to borrow billions upon billions.

      But we do.

      There is one thing that I will agree with you on - I am not disputing that the distribution of this spending has been unfair, corrupt, etc. Far from it. I am just saying that it happened and it has not stopped. And because it has not stopped, the troika is obsessed with cutting it further.

    8. a) It is not a matter of me ...liking Eurostat or national statistics. It is the fact that both have been unreliable in the past and remain unreliable in the present. You may like them because they give you 'evidence' to argue your points. For example, OECD's social expenditure stats for the same period paint a different picture and present a less dramatic 'jump' in expenditure. Check it out.

      b) The 15.6% budget deficit is seriously disputed by members of the very independent committee that supervised the new Statistical Authority. So, in a typical Greek way the Committee was ...resigned. The new Director (with background from ..the IMF) used a formula for calculating the deficit that included items that other EU member states do not include in their calculations of their deficits. Why should I believe Greek stats now when the people who produce them are totally unaccountable.

      c) population ageing does not explain solely the increase in spending. It is one of the contributory factors behind the continuous rise in the number of pensioners. Combined with a 'rush' to exit work before punitive measures are implemented can explain the rise, at least to a large extent. Unless we have a clear analysis what goes under this expenditure neither you nor I will be convinced.

      c) Regardless of me using caps or say things emphatically what I described in my previous comments about the looting of pensions funds by state and banks are historical facts and I am glad to see that you are not disputing them. What I tried to challenge here is one of the basic premises of your thesis - that austerity has not come to Greece yet - which says that expenditure on the Greek welfare state caused the increase in the deficit.

      We both know how politically important this point is.

      In any case, thanks for giving me the opportunity to at least provide an alternative narrative in your blog.


      (A) On the non-reliability of the Eurostat data. Today I accessed the Eurostat database checking against your ...Eurostat stats above on 'social benefits'

      You quote: 2009 - 21.1% Eurostat (TODAY) says: 21.2%
      You quote: 2010 - 20.8% Eurostat (TODAY) says: 21.3%
      You quote: 2011 - 21.9% Eurostat (TODAY) says: 22.6%


      Interestingly, it is the data after 2009 that seem to be continuously inflated. It is the year when the new director of ELSTAT took over (with IMF in his CV) and the committee of independent experts - appointed by the Greek parliament to supervise his work - was ...resigned.

      I wonder when will be the year that both Eurostat and ELSTAT will stop 'cooking' their stats on Greece!

      (B) Finally, adding to the list of factors that may have contributed to the rise in 'social benefits' expenditure:

      - in 2007-8 (Election year following massive fires for which substantial compensations were paid to those who suffered from the fires)

      - Between 2008 - 2011 unemployment explodes. Data below (with the latest Eurostat stats next to them:

      2008 - 7.7% - Exp.soc.ben. - 19.6% of GDP
      2009 - 9.4% - Exp.soc.ben. - 21.2% of GDP
      2010 - 12% - Exp.soc.ben. - 21.3% of GDP
      2011 - 17.3% - Exp.soc.ben. - 22.6% of GDP

      Indeed the 'paradox' - that in times of recession social expenditure increase (as unempl. compensation kicks in - is a well recorded occurrence in social policy studies, well documented, and totally understandable and justifiable.

      However in Greece we have a further paradox. As all unemployment compensation in Greece is contributory, long-term unemployed are not covered. Hence the second 'paradox' in Greece that while unemployment is rising exp. on unemployment compensation in Greece is not rising in the same rate.

      Nevertheless, it is interesting to observe that with 17.3% unemployment in 2011 (25% in 2012), up 5.3% in just one year, the expenditure on soc. benefits hardly goes up - even based on the dubious Eurostat/ELSTAT stats!

      What a better proof that the welfare 'state' in Greece IS starved (together with the unemployed and the vulnerable).

      Anyway, as said earlier thank you for giving me the opportunity to at least provide an alternative narrative about the welfare state in Greece in your interesting blog.

    10. @anonymous
      Very good points,particularly the last ones. My point of view is that for the common people in Greece (not the privileged ones) the social welfare system is a joke compared to the European standards. (I guess you agree with this). And the fact that the very same neo-liberal economic policies and the very same people who are mostly responsible for bringing the country to this situation are the same who now want to "save" Greece, is another joke...bad joke.

      Nikos San

  3. It's striking what a simple glance at these data can reveal. Of course, the majority of media (Greek or foreign), despite regurgitating the "evil" Troika's austerity measures on an hourly basis, will hardly bother to look at these numbers, let alone make a story out of them.

    It must be equally revealing to look at data on privatizations and payroll/headcount adjustments at SOEs (ΔΕΚΟ) to discover, for instance, whether the average railway (ΟΣΕ) employee still makes over €60K a year, i.e. 2-3x what an average private sector employee makes.

    Instead of focusing on further reining in expenditures via privatizations, a serious management of tax evasion and an adjustment of the absurdities at the state offices and SOEs (see: ΔΕΗ, ΟΣΕ), the administration has thus far chosen to look the other way and resort to measures that cannot ultimately suffice to bring the finances in order. Nor move toward changing the 300-year old culture of cronyism and disregard to laws, for that matter.

  4. The increase in spending between 2006 & 2009 is something anyone who lived here can testify to.

    However, I'm completely aghast at the sheer scale of the profligacy. Incredible that Karamanlis has largely escaped the opprobrium attached to Papandreou and Venizelos, when he was spending like a drunken sailor on shore leave.

  5. I am not an expert on public finance, bus as a reader and common tax payer, i would like to know what's the role of inflation in this case. I understand fully, that between wages of 2006 (23.3 / 11.2%) vs. wages of 2011 (26.6 / 12.1%) there is still a gap to close, but i feel that my buying power then (2006) was more than now (2011).

    1. Good point Perikli. The inflation adjusted wage bill in 2011 is 4.8% below its 2006 level. But real GDP in 2011 was 10.5% below the 2006 level. So the relative drop has been smaller than the contraction in the economy as a whole.

    2. To understand you correctly, we have an inflation-adjusted expediture on wages below 2006 but not enough according to the 10.5% drop of real GDP (2011 vs. 2006)?

      Another question here on expeditures (mainly investment in infrastucutre, medical stuff etc.) are the prices. Do we have also a drop of prices on stuff the governement buys with lesser budget now? (Ok. for sure military equipment prices did not drop because Greece spends less now;) ).

  6. According to this post, people are still better than they used to be in 2006? I strongly feel that this is not the case for the majority of people, including myself.
    I think that you have omited major factors that influence the buying power. For example, what is the impact of the increase in direct and indirect taxes?

    I know a lot of people who have trouble paying their electriciy bills, maybe we are living in two different worlds. Asking those people not to protest based on a random interpretion of a table of statistics is not healthy at least.

    1. I am *not* saying that people are better off than in 2006. What I *am* saying is that we do indeed live in two worlds - and one world is being asked to pay for the fact that the other world refuses to even return to where it was in 2000-2005. So the people who are being asked to pay *should* protest, although they should direct their anger at the right culprits. And if someone is protesting a cut in wages or benefits, we should also ask "a cut from what level?" If I double your payment and then cut it 10%, how can you say that the doubling was okay but the cut was unfair? Let's have some perspective is my point.

  7. What role does the 'restatement' of expenditure levels for Greece play in these numbers (i.e. Greece's restatement of actual expenditure numbers under pressure from Eurostat during 2010)? How far back did the restatement go? I'm wondering if the 2007 jump in spending is simply the result of more honest accounting or an actual jump in outlays. Dov

    1. Dov - excellent point. As far as I know the latest revision covers the data through 2006 - and this link confirms that (p. 4):

      So while new data could weaken some of the comparisons with earlier years (although frankly all the numbers on the table have been revised many times!), it should not invalidate the 2007-2009 jump.


  9. Excellent analysis i.e. the level of pensions in nearly all of the peripheral's remains excessive even after cutting 10% etc.

    It may sound harsh but for a country resources should be used on the young (future) rather than the old (past).

  10. Thanks for the nice analysis, but with respect to the “what the hell does the troika want from us”, one important detail is that I dont really remember recently the troika making at least a press conference, present their position to the public, explain why they suggest/force all these cuts. We only see them arriving at the airport, entering in an office with some government officials and following some negotiations, for which we only learn few details, they leave. We never get the feeling that there are real negotiations, that less harsh alternatives are researched, we never hear justifications. As for Greek politicians, they could at least try to explain these things as you write them, - if really that's the way it is. But again, I get the feeling that most members of the government have not the slightest clue about these numbers, let alone interpreting them. The news story of the minister of the previous government that signed the agreement with the troika without even reading it, is still fresh, so reactions are not totally unjustified.

    So, again thanks a lot for the very nice and well written analysis, but that's your view why troika suggests all these measures. We dont know if really the troika and the government reached to the measures using a similar approach. And as long as they continue to work in this way, isolated from the public, people who loose from all this mess will keep protesting and calling them 'evil'.

    1. No quarrel here, although my view is that it is the job of the Greek government, not the troika, to explain these cuts to the Greek people and why they are necessary. I am also fairly sure that this is what the troika is seeing because that's their job - to look at the country's finances and see how the budget can be balanced. I can't say for sure that the same understanding exists on the GR government side..

    2. Thanks for your answer - you are probably right that they reached to the same conclusion through the same path, but in essence, if they (government and troika) need to enforce harsh measures (probably unavoidable) they should at least work harder on gaining people's trust. That's not going to cease reactions completely, for sure, but its a reasonable approach and a step forward.

      My only other question is if you can understand why the potential goal to return to the 2006 level of expenses was not attempted from the beginning of the cooperation with the troika, in 2010. Every 6 months, new requests for budget cuts appear. Is it because the government failed to apply all the agreed measures, or because the suggested initial measures by troika were ineffective or unrealistic? Or maybe a combination of both?


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