A primary surplus that may exceed 3.5% of GDP, but no room for new benefits due to the implementation of the escape clause from excessive deficits across Europe, is foreseen by the head of the State Budget Office in the Parliament, Professor Ioannis Tsoukalas.

Presenting the State Budget Office’s quarterly report to the Parliament, Mr Tsoukalas was squarely on the side of benefits, such as, he said, restoring the 13th and 14th salaries. He said that “it would be a mistake to make such interventions, because they put us back into the process that put us in the crisis”. And he stressed that we must “not lose the stability we have achieved, because the problems (that are piling up in Europe) will come to us as well.

He pointed out that the escape clause concerns only spending on defense programs and armaments, clarifying that “fiscal space for benefits opens up only with an excess of tax revenues,” as it did last year, which reached €2 billion. In contrast, fiscal space is not opened by applying the escape clause, except “only if we want to increase defence spending above 3% of GDP”.

According to the Bureau’s report, increasing the disposable income of citizens will be achieved by reducing unemployment and increasing employment, as already recorded, by the new tax scale that will ease the burden on the middle class with incomes above 20,000 euros, and by wage increases such as those announced yesterday. However, he pointed out that“the most appropriate way for public sector increases is with efficiency incentives” and not with across-the-board increases for everyone.

He outlined several risks in the international environment and problems that are inflating in Europe (such as geopolitical tensions, tariffs on European products, low growth, sovereign debt, etc.). He said that if the EU had more growth, Greece would have even more growth.

In most indicators, Greece stands out internationally and is constantly improving. “The first priority, according to the head of the Bureau, should be the continuous reduction of public debt.

However, the country lags and is at a disadvantage compared to other countries in three key indicator areas: in inflation (and especially in housing costs), in productivity but in capital stock.

Based on the Bureau’s calculations, if Greece continues to record investment growth of 6.6% per year (as much as the average after 2020) in 2029 it will regain the capital stock it had in 2007 (pre-crisis) and in 2030 it will reach where it was in 2010 (a historical record). With lower investment (growing 4% instead of 6.6% per year), these will happen 6 years later, in 2035 and 2036, respectively.

The situation in Greece

According to the quarterly report, “the Greek economy has built a solid wall of economic and political stability, continuing in the fourth quarter of 2024 the steady path of improvement in macroeconomic and fiscal performance.” However, investment and productivity, with a focus on high value-added export sectors, remain “key”, combined with accelerated reforms across the economy.”

The Greek economy in 2024 recorded more than double the growth rate of the Eurozone, as Greece’s overall GDP for the year grew by 2.3%, while it grew 2.6% in the fourth quarter of 2024 compared to the fourth quarter of 2023, according to provisional data from ELSTAT. Contributing to this significantly positive GDP performance was the increase in exports of goods and services (3.6% overall, 5.9% for services and 1.6% for goods) and a 9.0% increase in fixed capital investment. Private consumption showed a slight deceleration in growth, recording 0.8% per annum for the fourth quarter of 2024, while for 2024 as a whole, it continues to show resilience with growth recorded at 2.1%. The contribution of public consumption (-3.4%) and imports of goods and services (up 2.4% overall) was negative.

Moody’s, the last of the three major rating agencies, upgraded the country’s credit rating to investment grade, following a previous upgrade within investment grade by Scope and DBRS. Greece’s ratings upgrades create more favourable financing conditions for the entire national economy.

Investment and productivity, with a focus on high-value-added export sectors, combined with accelerated reforms across the economy, are driving the improvement in the current account balance, which is set to deteriorate in 2024, and the faster convergence of the real income of citizens towards the euro area average.

International crisis

The global economy is reeling due to growing geopolitical and economic uncertainty stemming from fears of an unforeseen trade war between the US, EU, and China. A possible peace agreement in Ukraine would remove a major source of global geopolitical and economic uncertainty and, consequently, would be a factor that would make a positive contribution to future growth in Europe and, by extension, in our country.

Protectionist policies and tariffs threaten global trade, while geopolitical tensions strain supply chains, boosting inflation. The European Council agreed, in the context of strengthening the EU’s defence autonomy, on a defence spending package of €800 billion over four years, financed by €150 billion of European borrowing through the SAFE instrument, and national budgets with the flexibility provided by the activation of the escape clause. The historic agreement in the German Parliament on the easing of the debt brake leads to an unprecedented fiscal expansion of €500 billion for this country, on the one hand creating expectations of recovery from stagnation for the largest economy in the Eurozone and on the other hand signalling a change in the economic policy model of this country, with favourable consequences for the European and Greek economy.

In this highly volatile geopolitical and economic environment that is taking shape at the international level, the Office assesses as a top priority the continuation of the rapid reduction of public debt which enhances the perceived credibility of economic policy (we note that one factor that led to the recent upgrades by the rating agencies was the path of public debt). In this context, the fiscal space that may result from the European agreement on defence spending could, depending on its scope, also be used for policies that enhance the productive capacity of the Greek economy, such as easing the tax burden on wage labour.

Danger from tariffs

The GCI Report includes an analysis of the Direct Effects of the Anticipated New US Tariff Policy on Greek Steel and Aluminium Exports, considered in light of a similar “tariff experiment” conducted in 2018 that involved a similar change in US tariff policy, with a 25% tariff on steel imports and 10% on aluminium imports (abolished in 2021).

The steel and iron, and aluminum sectors are important pillars of our country’s heavy industry, with companies operating in these sectors being major employers in the Greek economy. The aluminium sector, in particular, is characterised by a high degree of extroversion and includes large capital-intensive industrial units for the production of raw material as well as small labour-intensive craftsmen active in the manufacture and installation of aluminium building products.

The imposition of a 25% tariff on US imports in 2018 is linked to a relatively high sensitivity of Greek iron and steel exports to the US to a 25% tariff increase in that country. This sensitivity does not necessarily mean that the industry did not have the flexibility to expand into new or existing export markets. On the other hand, the imposition of a 10% tariff by the US on aluminium in 2018 had no impact on Greek aluminium exports to that country.

In conclusion, based on the 2018 “experiment” of imposing a 25% tariff on steel and iron imports and a 10% tariff on aluminum imports, Greek steel and iron exports to the US were more sensitive than aluminum exports. The different size of the duty could be one explanation for this different impact. The impact of the 10% tariff on aluminium in 2018 does not appear to have affected Greek aluminium exports, suggesting that Greek aluminium exporters were able to cope successfully in 2018. Finally, Greek exports of intermediate products to the EU-27, which are used to produce finished goods exported from the EU-27 to the US, may be negatively affected by the new US tariff policy.

Collection of Tax Debts

A specific analysis of the Tax Administration Debt Collection Gap is included in the Annex to the Report. This is measured as the difference between the tax burden imposed on taxpayers and the burden they ultimately bear. In 2024 it stood at 0.8%, touching the lowest rate since 2000 and reflecting the strengthening of the Tax Administration’s collection performance. This rate is derived from the difference between the “average tax rate”, defined as the total amount due from the Tax Administration within the year to GDP, and the “effective tax rate”, defined as the total amount collected by the Tax Administration within the year to GDP.

According to the Report, the evolution of the Collection Gap is a key determinant of the path of the total arrears balance as it accumulates over the years until it reaches €106.3 billion in 2024. Characteristically, after 2015, the Collection Gap shows a decline (except 2020 when it increased due to the economic impact of the COVID-19 crisis), while over the same period, the growth rate of the total arrears gradually decreases. In fact, in 2024, when the Collection Gap reaches its lowest point (0.8%), there is an annual decrease in the total arrears balance of 7%.

Most of the Collection Gap in all years of the 2000-2024 period comes from non-tax debts and fines (57.3% on average). This is followed by indirect taxes with an average share of 24.3%, while direct taxes (18.4%) have the smallest share in the formation of the Collection Gap.