Key highlights of Greece’s updated Medium Term Fiscal Strategy

MoF tabled to parliament on February 8 the updated Medium Term Fiscal Strategy (MTFS) for 2013-16, which is scheduled to be voted by February 18 and is a prerequisite for the approval and disbursement of the next aid tranche of €2.8bn.

It is noted that the previous MTFS was passed last November (prerequisite for the approval of the aid tranche of €49bn by the Eurogroup in December) and, according to the latest MoU, would be revised in January ’13 incorporating 3-year expenditure ceilings for government subsectors (particularly central government and health sector). Apart from central government, the updated MTFS incorporates caps in the expenses of legal entities and state-controlled companies (consolidated in the general government), local governments and social security funds.

MoF notes that macro assumptions remained unchanged in the updated MTFS compared to those last November, while deficit estimates do not take into account any impact from bank recapitalisation, which has not yet been completed. Furthermore, the better-than-expected fiscal outcome in 2012 has not been incorporated in the revised fiscal forecasts. The latter primarily reflects lower interest payments in the coming years after the debt buyback in December and November 26 Eurogroup decisions on the lowering of interest rates on bilateral and EFSF loans as well as extension of maturities (by 15 years) and deferral of interest payments (by 10 years).

As a result, interest payments (under ESA95) are now expected at €8.3bn in 2013, €9.7bn in 2014, €10.8bn in 2014 and €11.2bn in 2016, implying a reduction of 1.8bn, €1.3bn, €1.3 and €1.5bn respectively vs November estimates and corresponding to 1.0pp of GDP in 2013 and 0.7-0.8pp in each of the next three years until 2016.

We summarise below the key fiscal forecasts of updated MTFS:

  • General government deficit is now expected lower at €7.9bn or 4.3% of GDP in 2013 (from €10.05bn or 5.5% in November), at €5.15bn or 2.8% in 2014 (from €6.89bn or 3.8%), at €6.97bn or 3.7% in 2015 (from €8.2bn or 4.4%) and at €4.55bn or 2.3% in 2016 (from €6.32bn or 3.2%).
  • General government primary surplus is estimated at higher levels in 21013-14, yet lower in 2015-16. In particular, it is targeted at €0.49bn or 0.3% of GDP in 2013 (from zero in November), at €4.47bn or 2.4% in 2014 (from 2.74bn or 1.5%), at €3.69bn or 2.0% in 2015 (from €5.63bn or 3.0%) and at €6.35bn or 3.2% in 2016 (from €8.84bn or 4.5%).
  • General government debt is seen materially lower at €318.8bn or 174.2% of GDP in 2013 (down 27.4bn or 15pp of GDP compared to previous forecasts), at €319.1bn or 174.7% in 2014 (down €31bn or 17pp), at €322.0bn or 171.5% in 2015 (down €35.7bn or 19pp) and at €322.3bn or 164.0% in 2016 (down €41.1bn or 20.9pp).
  • GDP (in absolute numbers) is forecasted at €183.0bn in 2013, easing to €182.7bn in 2014, increasing thereafter to €187.8bn in 2015 and €196.5bn in 2016. Note that GDP forecasts remain unchanged vs November figures.
  • Budget revenues are now seen slightly lower at €45.7bn in 2013 (from €45.3bn in November), €45.0bn in 2014(from €45.15bn), €45.2bn in 2015 (from €45.5bn) and €46.3bn in 2016 (from €46.6bn).
  • Budget primary expenditure remains almost unchanged (vs November forecasts) at €44.75bn in 2013, slipping to €41.4bn in 2014, €40.8bn in 2015 and €40.7bn in 2016

The updated targeted policy interventions of €13.4bn include measures of €9.7bn on the expenditure front, the bulk of which is expected to be implemented in 2013-14 with estimated cost savings at €7.4bn and €2.2bn respectively, and €3.6bn on revenues (€2.15bn in 2013 and €1.47bn in 2014).

Expenses interventions mainly involve pensions (€5.25bn, with €4.8bn implemented in 2013), salaries (€1.37bn, out of which €1.1bn in 2013), health (€1.1bn, with €0.46bn to be implemented in 2013 and €0.62bn in 2014), public sector restructuring (€0.82bn, equally split in 2013 and 2014).

Policy interventions on revenues include tax reform (€0.85bn in 2014), unified cap on insurable salaries (€0.61bn in 2013), reduction in family benefits (€0.38bn – €0.20bn in 2013 and €0.18bn in 2014) and tax exemptions on physical persons (€0.24bn in 2014), increase in interest tax rate to 15% from 10% (€0.24bn in 2013) and gaming tax (€0.3bn in 2013).

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