Fiscal consolidation envisaged in 2013 draft budget will primarily stem from further cost cutting

MoF unveiled the 2013 draft budget, which envisages a general government primary surplus of €2.2bn or 1.1% of GDP and deficit of €8.0bn or 4.2% of GDP, implying a 2.5pp improvement compared to 2012 latest estimates. Note that 2013 forecasts incorporate targeted policy interventions of €7.8bn, currently under negotiation with the troika. It is noteworthy that the bulk of the anticipated fiscal consolidation in 2013 stems from further cost cuttings, particularly regarding wages and pensions, while revenues are seen retreating for yet another year. Key concern remains the indirect impact of austerity measures on real economy and households’ disposable income, while the long-awaited tackling of tax evasion is most likely postponed for 2014.

General government deficit is estimated at €8.05bn or 4.2% of GDP in 2013 from €13.3bn or 6.6% of GDP in 2012. It is noteworthy that despite deeper recession, new estimates for 2012 call for a marginal (0.1pp) better fiscal performance compared to the Supplementary Budget Law target of 6.7%. General government primary surplus is seen at €2.16bn or 1.1% of GDP in 2013 compared to deficit of €2.79bn or 1.4% of GDP forecasted for 2012.

General government debt is seen reaching €340.6bn or 169.5% of GDP in 2012 (down €15bn or 4.2% y-o-y in absolute numbers) and is anticipated to increase to €346.2bn or 179.3% of GDP in 2013 (up 1.6% y-o-y). According to MoF, the drop of debt by only €15bn in 2012, despite the positive impact from PSI of €106bn, reflects an increase of: €49bn from bank recapitalization, €13.3bn from fiscal deficit, €11bn from losses of local governments and social security funds, €3.5bn from the payments of arrears to the private sector as well as coverage of state needs for Q1’13.

MoF expects ordinary revenues to ease 4.1% y-o-y in 2013 (2012: -5.1%) to €47.6bn, mainly reflecting a drop in direct and indirect taxes by 2.5% y-o-y to €20.2bn and by 4.1% to €25.2bn respectively. Note that net revenues are expected to decline by 4.5% y-o-y to €46.7bn (24.2% of GDP).

Expenditure is estimated to retreat by 8.5% y-o-y to €56.6bn in 2013, after easing 11.9% y-o-y in 2012. In particular, primary expenditure is seen down 4.4% to €45.3bn mainly reflecting a further decline of wages and pensions by 10.6% (2012: -6.5%) to €18.2bn and operational expenses by 13.4% (2012: -1.7%) to €6.0bn, while social security grants are seen marginally up (+0.6%) to €15.8bn, after slipping 11.6% in 2012. Interest payments are expected to be reduced by 28.2% y-o-y to €11.7bn in 2012 and by a further 23.7% y-o-y to €9,0bn in 2013.

The aforementioned fiscal forecasts incorporate targeted policy interventions of €7.8bn, which is the part of the currently negotiated with the troika 2-year package of measures worth €13.5bn that refers to 2013. It is noted that the bulk of these interventions (€7.3bn) stem from cost cutting and just €0.5bn from additional revenues. In particular, cost savings are anticipated to mainly derive from cuts in pensions (€3.8bn), wages (€1.1bn) and health (€0.8bn). On the revenue front, €0.4bn are expected from the rationalization of family benefits.

Regarding key macro assumptions, MoF anticipates GDP to contract 6.5% in 2012 and a further 3.8% in 2013 incorporating: a decline of private consumption by 7.7% in 2012 and 5.9% in 2013, a decrease in public consumption by 6.5% in 2012 and 7.2% in 2013 and a further decline in investments by 18.5% in 2011 and 3.7% in 2013. Furthermore, nominal GDP, which stood at €215.1bn in 2011, is seen easing to €200.9bn in 2012 and €193.1bn in 2013. Unemployment rate is expected to increase by 6.2pp y-o-y to 23.5% in 2012 from 17.3% in 2011, while is expected to decelerate to 24.7% in 2013.

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