Greece Macro Flash: Draft Government Budget 2023 | Credible target for a primary surplus with strong cyclical tailwinds helping to offset the energy-related stress

Returning to a primary surplus combined with a new substantial drop in debt-to-GDP ratio in 2023, despite persistent energy headwinds

The Draft Government Budget for 2023 aims at restoring a fiscal primary surplus in 2023, continuing on the improving trend experienced in 2022, despite the higher-than-expected fiscal support implemented in 2022 to cushion the impact of energy crisis and surging inflation.

Despite a less supportive economic environment, the General Government primary balance is expected to swing back to a primary surplus of 0.7% of GDP in 2023, from an estimated primary deficit of 1.7% of GDP in 2022, significantly improved compared with a deficit of 5.0% in 2021.

The strength of the economic recovery in 2022, in conjunction with improved fiscal efficiency, led to a much better-than-expected rebound in tax revenue in FY:2022; estimated at €4.6 bn above the respective Budget 2022 target (+13% y-o-y). A surge in VAT revenue accounts for 2/3rds of the increase, with PIT and CIT revenue also outperforming the original targets.

Primary expenditure is envisaged to drop by 4.0% of GDP on an annual basis in 2022, on the back of favourable cyclical effects. Primary expenditure reduction will be the main source of fiscal adjustment in 2023 (3.4% of estimated GDP) arising from the non-renewal (and frontloading in late-2022) of some energy support measures and the elimination of the remaining Covid-19 support schemes.

In 2023 the increase in tax revenue is conservatively assumed to be moderate (+2.9% y-o-y), due to slowing economic growth and lower inflation, as well as the introduction of new tax relief measures (abolition of the social solidarity surcharge on public servants and pensioners).

Nevertheless, the fiscal support to the economy in 2023 will remain significant but will be more targeted than in 2022. The  gross value of fiscal support is  estimated at €13.4 bn in 2022 and at c. €10 bn in 2023, with around €7.0 bn of financing raised through the national Energy Transition Fund (ETF) in 2023 broadly similar to the level in 2022, thus reducing the impact on the Budget.

The key fiscal risks for 2023 include: i) worse-than-expected developments on the energy front; e.g. crude oil prices significantly above $96 per barrel (assumed in the Budget) and natural gas prices higher than €200/MWh, resulting to higher and more persistent inflation and additional need for support, and ii) a deeper recession in the euro area from the energy and geopolitical stress, which would take a heavier toll on Greece’s external demand conditions and tourism.

Public debt is projected to decline to a 13-year low of 161.6% of GDP in 2023 from 169.1% in 2022 and 193.3% in 2021, and, in conjunction with the prospective achievement of a primary surplus, is expected to support the effort to regain investment grade status.

 

Greece Macro Flash: Draft Government Budget 2023 | Credible target for a primary surplus with strong cyclical tailwinds helping to offset the energy-related stress
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