The reasons behind the prime minister’s ‘brake’ on benefits

The reasons behind the prime minister’s ‘brake’ on benefits

By Tasos Dasopoulos

The delicate balance between fiscal adjustment and support of the real economy will determine the package of reliefs that will be announced from Thessaloniki by Prime Minister Kyriakos Mitsotakis, even though we are already going through the time in which we will have national elections.

The Prime Minister on Tuesday, in his Cabinet briefing, was quick to contain the excessive expectations that have begun to develop. The head of the government is well aware not only of the possibilities, but also of the challenges that the economy has to face until the end of 2023.

The first is to recover, as quickly as possible, the investment grade, which has been designated a “national objective”. Greece’s upgrade will create a strong line of defense for Greek bonds in an extremely unfavorable time. Achieving this goal does not allow deviations from the government’s reform agenda and, above all, does not allow a failure in the fiscal targets of 2022 and 2023. In other words, the rating agencies, as well as the markets, do not receive the image of a Greece, which, due to the crisis, is slipping back into a situation that put it in 2010, in the vicious cycle of memos.

The second challenge is for the real economy, which is not only recovering from the coronavirus, but also from the 10-year financial crisis that preceded it, to remain as unaffected as possible by the current energy crisis.

Already, based on a study by the Bruegel Institute, Greece has been declared a “champion” at the European level in terms of supporting businesses and citizens from the consequences of the energy crisis and is expected to continue to provide targeted support to those most in need.

The detail that the Prime Minister knows is that the money for the support measures must not come from borrowing, because that would increase the deficit and the debt. The financing of support measures should be exclusively from excess tax revenues. That is why the measures come in waves, depending on the course of the economy.

The permanent reliefs

With regard to the permanent reliefs, which will take effect for 2023, where the excessive expectations are mainly found, K. Mitsotakis knows that, in addition to the tax reductions, Greece will have to pass from the primary deficit to a surplus. In particular, from 2022, which is expected to present a deficit of 2% of GDP, which corresponds to an amount of approximately 4 billion euros, we should move to a surplus of 1% of GDP (approximately 2 billion euros).

Therefore, just to meet the fiscal target, an adjustment of €6 billion will be required. 450 million euros should be added to this amount for the extension of the abolition of the special public solidarity levy and pensions. But €500 million will be required to give increases to pensioners who do not have a personal difference. Efforts are also being made to find another 500 million euros to extend the low VAT rates in tourism, restaurants, transport, theaters, cinemas, gyms and dance schools for 2023.

Drawing a line, one understands that, just with the measures already announced, the year-on-year improvement should exceed 7 billion euros, while the Eurozone is threatened with recession from the end of 2022.

European restrictions

In addition, the fact that the extension of the comprehensive escape clause in 2023 also sets strict limitations regarding the implementation of permanent measures in the member states has been overlooked.

The European Commission, at the same time, has already announced to both Greece and the rest of the countries with high debt (Italy, Spain, Portugal) that they should be very careful with their spending in 2022 and 2023.

The mandate that came with the guidelines for next year is that heavily indebted countries should target the economically vulnerable while reducing deficit and debt.

With these facts, no one from the government wants Greece to become the target of critical comments from the Institutions again.

Source: Capital