By Tasos Dasopoulos
The persistently high inflation that we have been experiencing for about a year, reaching 11.6% in July, has significantly reduced the purchasing power of our incomes and is squeezing GDP due to the increased value of imports of fuel and raw materials. However, it also has some, few, positive sides.
It significantly improves, without fiscal effort, the size of the debt and the deficit, which is critical for Greece, while giving scope for support measures such as those coming in the autumn, which offset part of the negative consequences on incomes.
The shock suffered by households and businesses with the sharp rise in fuel prices, from the last quarter of 2021, is due to the economic crisis experienced by Greece, which from 2012 onwards led to negative inflation levels for about 10 years. Even after the end of the memoranda, in 2019, average inflation was negative. In 2020 the average annual inflation was -1.2%. In 2021 due to the reversal of the trend from the middle of the year, annual inflation reached 1.2%. In 2022, inflation was 6.2% in January and six months later it doubled to 12.1% in June, which is as much as it was in the mid-10s of the 1990s when the currency was the drachma, although in July it fell to 11, 6% At the same time, apart from the tax reductions (ENFIA, income tax) that increase incomes proportionately, public and private sector wages remained unchanged with the exception of the double increase of the minimum wage by 9% since the beginning of the year. It is, therefore, obvious that the rise in inflation is putting more pressure on incomes in Greece than in other EU member countries.
In an attempt to compensate for the losses, the government has launched a bold package of support measures that have so far reached 8.5 billion euros in an attempt to mitigate the negative consequences of high prices and is also preparing a new package of measures for the autumn .
Inflation creates fiscal space
The margin for these support measures is given by the fact that now the state budget revenues are “inflated” while the state’s expenditures, at least the inelastic ones such as salaries and pensions, are “deflated”. In simpler terms, the excess of revenues by 1 billion euros in indirect taxes, recorded for the first half of the year, is due to the higher prices of products (whether they are fuel, whether they are food, or whether they are services) on which the taxation.
Even the revenues from tourism are also “inflated”, since in the turnover increase of 6-7 billion euros that we expect for this year compared to 2021, a rate of about 8% should also be calculated from the increase in the prices of accommodation and related activities due to inflation.
On the other hand, State salaries and pensions remain at the same levels as they were in 2019. The same goes for the expenditure on grants and the returns of resources to the OTAs.
Increased public revenue that incorporates inflation minus spending forms the additional fiscal space needed to continue supporting households and businesses for as long as needed. All this, of course, without changing the basic fiscal target that wants the primary surplus to decrease to 2% of GDP from the 5% of GDP that had reached the end of 2021.
Lower debt and deficit
A second positive effect of high inflation is the indirect reduction of quantities such as debt and deficit which are recorded smaller as a percentage of GDP without much effort. We had a first positive effect on the level of debt and deficit in 2021 when, for the first time after 9 years, annual inflation was positive. The benefit will be even greater this year. Inflation and higher growth are expected to push the debt-to-GDP ratio below the 180.2% predicted in the stability and growth program sent to Brussels since the end of last April. Inflation will have the same effect on the size of the deficit, which will be less than the 2% of GDP foreseen in the budget. The effect on debt and deficit will be greater this year, as inflation itself is expected to reach close to 8% on an annual basis. The new forecasts will be integrated into the Medium-term Fiscal Strategy Program (MFSP) 2023-2026 which the Ministry of Finance is expected to finalize and send to Brussels within the next month.
The current account deficit
Somewhere here the positives of high inflation end and the negatives begin. In addition to the obvious, namely the significant reduction in the purchasing value of incomes, the continuous revaluations have a heavy impact on the Gross Domestic Product as well as on the competitiveness of the economy. In particular, in terms of GDP, the greater the value of imports, the greater its reduction. As an indication, we can mention that based on the latest published data of ELSTAT, imports for the six months of January June were increased by approximately 51.1%, reaching 43.6 billion euros in 2022 from 28.86 billion euros in 2021. Only for fuel, the country paid approximately 7 billion euros more than last year, i.e. it lost an amount equivalent to 2.6% of its GDP. At the level of competitiveness, the big picture is given by the balance of current transactions published by the Bank of Greece. Based on the latest data, the current account deficit for the five months of January-May jumped to 10-12 billion euros, recording an increase of more than 4 billion euros compared to the deficit of 6.07 billion euros recorded the same period of 2021. It is characteristic that the current account deficit is approximately the same as the cost of fuel imports which reached 10.17 billion euros in the five months. The only hope to contain the current account deficit lies in tourism, which for the five months had increased the surplus in the balance of services by approximately 2 billion euros.