Greece: Macroeconomic Outlook - December 2010

Greece’s fiscal adjustment effort is ambitious and front loaded. The deficit of general government is on track to decline by 6% of GDP in 2010, and is targeted to decline by another 2% of GDP in 2011. The adjustment in the fiscal accounts in 2010 targeted “quick wins”. The 2011 adjustment focuses more on attacking the chronic structural weaknesses of the deficit (e.g. tax evasion, inefficiencies in public enterprises, the health system and local government). The 2011 adjustment contains larger implementation risk, but also the possibility of larger-than expected gains from their appropriate execution. Indeed, if all of the announced measures are fully implemented, the budget should overperform.

Clearly there is little room for slippage and further efforts will be needed to attack the structural weaknesses of the deficit in 2012 and 2013. The main ones are: i) broadening the tax base including, most importantly, the fight against tax evasion which -- according to NBG estimates -- exceeds 6% of (official) GDP (i.e. not accounting for the grey economy); and ii) an expenditure-to-GDP ratio that is near 50% of GDP, with weaker productivity from public expenditure compared with peers. In view of the poor performance in these areas, there exist “low hanging fruit”, which should yield significant results quickly in what otherwise are drawn out reforms.