Greece on Monday will present its draft 2011 budget, targeting a smaller fiscal adjustment to dig out of its debt crisis after a big deficit reduction this year, still a challenge within a persisting economic slump. Under the terms of a 110 billion euro bailout agreed with the IMF and its euro zone peers, Greece must cut its budget hole by 50 basis points to 7.6 percent of GDP.
It will be a lighter task compared to this year's 5.5 percentage point fiscal correction which is meant to shrink the budget gap to 8.1 percent of GDP.
"The projections in the 2011 draft budget will be in line with those in the EU/IMF memorandum," a senior government official, who did not want to be named, told Reuters.
Greece's austerity drive will continue despite soaring joblessness and a deepening recession as the government takes new measures to boost revenues by an extra 5.5 billion euros and curb spending by 1.6 billion next year.
The budget will likely rely on property taxes, an amnesty on building violations, new gambling licenses and raising the low VAT rate to 13 from 11 percent, officials said.
Measures are likely to include taxing wages in kind such as cars, raising the legal values of real estate used by tax authorities on property transfers and a special levy on profitable firms.
"Portugal is making the bulk of its budget consolidation in 2011. The route Greece has taken, making the biggest part of the adjustment in 2010 is better because it sent from early on a clear signal to create confidence," said Andreas Scheuerle, an economist at DekaBank.
Some officials say the budget deficit target may be slightly below 7.6 percent of GDP, partly thanks to the fact that this year's higher-than-expected inflation may increase nominal GDP.
But EU and IMF officials will focus on the money figure for the deficit, which they have set at 17 billion euros for next year, rather than on the deficit to GDP ratio to filter out such possible changes to the denominator from inflation or revisions, officials said.
In their latest projections the country's international lenders forecast the budget deficit would stand at 7.9 percent of GDP this year and 7.3 percent next year.
The IMF projects the 240 billion euro economy will contract by 2.6 percent next year after a 4.0 percent slump in 2010.
REVENUE WEAKNESS
Athens raised the main VAT rate by four percentage points to 23 percent this year but eight months into 2010 revenues trail a 13.7 percent growth target, up just 3.4 percent.
Economic think tank IOBE said the shortfall forced the government to chop its investment programme by 33 percent to ensure the deficit target will not be missed this year, meaning a 1.2 percentage point hit on gross domestic product (GDP).
"Authorities underestimated the price and income elasticity of demand," IOBE said in a quarterly report.
On the spending side, the socialist government will likely shoot for extra savings of 1.6 billion euros from belt tightening, including cutting half a billion euros from its investment programme.
Analysts say the EU/IMF plan to be implemented in next year's budget creates a sufficient cushion against risks including a sharper-than-expected economic downturn, reform fatigue and poor results in reining in tax evasion.
"The consolidation programme for 2011 outstrips the deficit reduction target by more than 3 percentage points of GDP. Unless we have an unforeseen external surprise or a very significant contraction in growth, next year's target can be fully attained," said economist Platon Monokroussos at EFG Eurobank.
