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Sunday, 28 August 2011

PRIMARY DEFICIT ENTERS THE TWILIGHT ZONE

Readers will remember my little naive model for the primary deficit, the one that kept warning that the public finances are becoming unstable. I called it naive in my last post on the matter in order to indicate that it's fitted to a simple pattern with little basis in the actual economics of the Greek state.

Well as with all naive models it has just been blown to shit by the facts. You see, the model as of June 2011 looked like this:


 Now that the figures for July have come in, it looks more like this:


When the data no longer fit one's model, it's the model that has to go. But I think you'll agree with me that we're in uncharted territory here in more ways than my own failed predictions can demonstrate. I will set the model aside for now then and just show you the facts.

July was a surplus month as expected. But whereas July 2010 returned a primary surplus of EUR730m, July 2011 returned a much smaller primary surplus of EUR385m. We've now exceeded the 2010 primary deficit every month since April, as per the graph below:


All in all, we're already EUR1.8bn off last year's primary deficit figures. Mind you, that year's ytd spending figures have been mysteriously revised upwards by EUR340m, and the June figures by EUR240m, so it's hard to know what really happened last year until this year is over. All I know is that at this rate we're on track to achieve a primary deficit of EUR8bn if all following months exactly mirror those of 2010, or EUR9.4bn if the current trend persists.

Is this due to the deeper-than-expected recession, as both the Ministry of Finance and its critics claim? Well, according to the Ministry's figures revenues are down by EUR1.9bn year on year while primary expenditures (including, as I always do, public investment) are down by a mere EUR113m - and that's only because the public investment budget has been slashed by another EUR1.6bn. Otherwise, public expenditure has risen (yes, risen) in 2011 so far. Cutting public investment is the worst way to cut the deficit and the IMF knows this.

So why they are allowing it is beyond me.  

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