The budget deficit stabilised in the first two months of the year, reaching EUR 202.6 mln, or 1.1% of (presumably) quarterly GDP according to the Ministry of Finance, compared with EUR 199.8 mln in the first two months of 2011.
However, the figures suggest that there is still a long way to go to meet the government’s targets.
The finance minister, Vassos Shiarly, said that the government aims to cut the budget deficit to 2.4% to 2.5% of GDP in 2012, from 6% of GDP in 2011.
The range of measures introduced last year to cut the public-sector wage bill and reduce expenditure led to a 1.5% drop in expenditure on wages and salaries to EUR 289.8 mln and a 11.6% cut in “other current transfers” to EUR 295.6 mln.
These are the two biggest items of expenditure each year, accounting for 55% of the total in 2011.
Defence expenditure was also cut by 66.5% to EUR 5.7 mln.
However, the EUR 42.9 mln saved on wages and current transfers was offset by a EUR 48.0 mln increase in subsidies (EUR 24.9 mln), social security payments (EUR 14.3 mln increase) and interest payments (EUR 7.8 mln increase).
Social security payments have increased as a result of soaring unemployment and interest payments have risen as a result of successive downgrades of sovereign debt ratings. However, it is not immediately clear why subsidies have increased.
Sadly most of the rest of the savings were made by cutting capital expenditure, which was cut by EUR 10.5 mln to EUR 27.0 mln.
This could turn into a vicious circle, as less government investment leads to higher unemployment, higher social security payments and still high interest rates on government debt, thus preventing a real consolidation of government finances.
More austerity needed
Shiarly said on Monday that the budget deficit must be contained at 2.5% of GDP “at all cost”, suggesting that more austerity measures are needed.
He added 200 mln euros more of savings are needed and that all possible expense cuts will be exhausted before considering the final measure of higher taxes.
Saying that it is crucial to regain credibility and that the most important issues are fiscal discipline and the recapitalisation of the banks.
Fiona Mullen
Sapienta Economics Ltd
