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  • Greece Macro Flash │ Budget 2022: Rapid fiscal rebalancing in 2022 on the back of strong macroeconomic tailwinds accompanied by surging public investment

Greece Macro Flash │ Budget 2022: Rapid fiscal rebalancing in 2022 on the back of strong macroeconomic tailwinds accompanied by surging public investment

17/12/2021 - Reports

Greek Economy

Rapid fiscal rebalancing in 2022 on the back of strong macroeconomic tailwinds and reduced Covid-related spending; nevertheless accompanied by surging public investment to support the economy’s competitiveness


The Government’s Budget for 2022 aims at taking large steps toward restoring fiscal equilibrium, after two years of strong accommodation due to the Covid-19 pandemic.

Indeed, fiscal support in FY:2021 amounted to nearly €16 bn or c. 9.0% of GDP, provided mainly in H1:2021. However, the strong GDP recovery since Q2:2021, bolstered by the continuation of targeted fiscal stimulus, supported tax revenue, and allowed a gradual unwinding of expansion measures in the second half of the year. In fact, primary expenditure as per cent of GDP decreased, on an annual basis, by 1.2% in FY:2021, and 5.3% in H2:2021. 

Tax revenue in FY:2021 increased by a respectable 4.7% y-o-y, due to robust VAT revenue (+11.4% y-o-y) and surprisingly strong proceeds from CIT (+20.5% y-o-y), supported by resilient profitability. These increases have been partially offset by the drop in PIT revenue (-0.7% of GDP or -5.2% y-o-y in FY:2021).

The 2022 Budget envisages a substantial decrease in the primary deficit, by €10.6 bn, to 1.2% of GDP in 2022 from an estimated 7.3% in 2021. Supportive cyclical conditions and the temporary nature of €9.5 bn of fiscal stimulus provided in 2021 will lead the adjustment effort.

Specifically, primary spending (excluding PIB and RRF) is expected to decline by €7.3 bn (or by 5.5% of annual GDP) in 2022, also providing some fiscal space to finance targeted expenditure on active labor market policies (€0.2 bn), military equipment (€0.8 bn) and the setup of a contingency reserve of c. €2 bn.

The remaining part of the fiscal improvement in 2022 reflects an increase in tax revenue of €3.5 bn (equivalent to a change in the revenue share in GDP of 0.5%) – a 7.5% y-o-y increase. Around two thirds will come from higher VAT and consumption tax revenue (+9.6% y-o-y and 7.7% y-o-y respectively) while the remainder is linked to income taxes (+9.3% y-o-y) as CIT and PIT revenue both recover. 

Notably, a substantial increase in public investment is planned for 2022 (including expenditure financed by the RRF), with PIB spending up by 23% y-o-y to €11 bn. Thus, the share of public investment in GDP is expected to climb to an 18-year high of nearly 6%, supporting economic growth and giving rise to positive second-round effects on activity, given the high multiplier effect of public investment on GDP. 

Overall, the primary deficit is expected to decline from 7.3% to 1.2% of GDP, while the decrease in the cyclically adjusted primary deficit is estimated at 3.8% of GDP between 2022 and 2021.