Greece Macro Flash: General Government Primary Surplus 2017

Greece strongly overperformed its fiscal targets for a second consecutive year

The primary surplus in the General Government Budget increased to a historical high of 4.2% in 2017 of GDP from 3.8% in 2016 and 0.6% in 2015, exceeding the Programme's maximum target for a surplus of 3.5% of GDP (initially targeted for 2018).

The fiscal overperformance led to a higher-than-expected fiscal drag in 2017 of about 1.2% of GDP, compared with initial estimates for a fiscal easing, contributing, inter alia, to the relatively modest GDP growth outcome of 1.3% y-o-y in 2017 – against initial estimates for annual growth of c. 2.5% y-o-y for this year. 

A surprisingly strong improvement in the financial balance of the social security system of 0.5% of GDP in 2017 (to an annual surplus of 1.7% of GDP) is the main driver behind the improvement in the primary surplus, reflecting both buoyant revenue (+6.7% y-o-y or c. +0.3% of GDP, excluding government transfers), as well as restrained spending (-2.7% y-o-y or 0.2% of GDP lower than in 2016).

2017 was the first year since the beginning of the crisis when total spending on pensions declined (down by 2.7% y-o-y or 0.3% of GDP), reflecting higher savings from the streamlining of social benefits and additional reductions in average retirement benefits for new pensioners from the application of Law 4387/2016, as well as the complete phasing-in of other reforms legislated in previous years.

The recovery in employment is estimated to have added almost +€0.3 bn or 0.15% of GDP to the system's revenue, while revenue from confiscations for contribution arrears and multiple installment arrears-clearance schemes increased by an estimated 0.17% of GDP.

VAT remained the most dynamic contributor to revenue, increasing by 5.5% y-o-y in 2017 compared with an increase in nominal domestic demand of 2.4% y-o-y, supported by improving compliance related to increased cashless payments. This improvement was offset by the fatigue in direct tax revenue.