Monday, 13 February 2012


Dear readers,

I know there are serious things afoot in Greece and I'm not contributing very much, but the truth is that politics is not my thing; I don't have anything particular to add to the newsflow and am privy to no information beyond that. This is the time for insiders, and I'm not one of them, so why add to the torrent of pointless speculation?

That said, I have been hounded for some days now by Tweeps who have read this article and don't know what to make of it. In particular, friends have got very excited by the suggestion that Greece is currently running a whopping EUR1.8bn primary surplus.

While it's usually best not to lock horns with @BBCStephanie, the BBC Economics editor, this is an important issue, so I'll try to explain why, despite the noteworthy progress so far, the 'surplus' is an illusion.

First, it is important not to extrapolate annual figures from semi-annual ones. Second semester deficits have, for the past three years, been consistently smaller than first semester ones, and not because of fiscal adjustment alone. The three graphs below, based on the latest Budget Execution bulletins, show the monthly and semiannual primary deficits we've recorded over the last three years and should help @BBCStephanie reconsider how the primary deficit is evolving:

Second, it is important not to take the Greek government's primary deficit figures at face value because these are subject to VERY substantial revisions, only ever pointing upwards, and also because they omit a number of items that still make it onto our borrowing requirements. The reason for the first limitation is simple: it takes months for all of the government agencies and ministries to turn in their data and for the Finance ministry to quality-check them.

Compare, for instance, the original December 2010 budget execution bulletin, citing a EUR19.4bn deficit, to the December 2010 figures included in the latest budget execution bulletin for December 2011, citing a deficit of EUR21.5bn. The difference is a whopping EUR2bn more spending (about 1.5bn of this in December's monthly revision alone) and in fact, if you consider the total borrowing requirement, it grows to an amazing EUR4.9bn. We won't know the true size of the 2011 deficit, or indeed that of the second semester, until about a year later, and something tells me it will turn out to be higher as well.

Third, as Philip notes in the comments below and as I've also noted in the past, a lot of the tax measures involved in cutting the primary deficit are unsustainable one-offs. When these wear out the result could be a return to the bad old days, but the damage to business and consumer sentiment will be lasting.

For now, the second half of 2011 has indeed been a very good time for the primary deficit and long may this trend continue. It's fair and appropriate to report on this but another thing entirely to deduce policy implications for it, or a change to Greece's negotiating strength. Greece's policy-minded moderates have been looking for a sign of a primary surplus for a long time and to give them one prematurely could force the Greek government's hand in unpredictable ways. Don't forget, the second semester of 2011 was relatively benign in that expectations of the extent of GDP contraction were more or less borne out, unlike the surprisingly bad first half. What's the chance of any further negative surprises in 2012? Yeah, I thought as much.

I too want to see a primary deficit that will restore some level of sovereignty to Greece, and I do believe we're slowly getting there. But if we don't care how far we still have to go then we might as well have defaulted in the spring of 2010. 


  1. I would say that the biggest problem with this primary surplus is that it is not sustainable. It relies extensively on taxation eg retroactive taxes for the previous years earnings, real estate taxes.

    In 2012 quite simply there will be far less money to pay these taxes. That's the problem when you are a politician and you prefer to safeguard your cronies jobs and pensions rather than tax everybody

  2. the other temporary measure is on the expenditure side: non- or late payment of suppliers has helped the 2011 deficit too. You gotta love government accounting... Niall


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