April 23, 2012 / 2:13 PM / 6 years ago

Painful Greek austerity bit into 2011 budget gap

ATHENS (Reuters) - Battered Greece saw its budget deficit fall to 9.1 percent of gross output last year as severe austerity required to secure international aid bit.

More pain is expected after elections next month as the twice bailed out country seeks to dig itself out of a fiscal hole.

Since 2009 when its debt crisis emerged, Greece has been unwinding economic imbalances through a deep economic slump and slowly improving competitiveness, a therapy prescribed by its international lenders.

But recessionary headwinds coupled with political and social tensions have hampered efforts to meet ambitious fiscal targets set by its euro zone partners and the International Monetary Fund.

Data released on Monday showed that Athens managed a 1.2 percentage point fiscal improvement compared with 2010 but its primary budget balance - which excludes debt servicing costs - has yet to move into surplus, a key target to stabilize debt.

Still, Greece managed to cut the deficit by 6.5 percentage points in two years after a fiscal derailment in 2009 that sparked its debt crisis. During the same period it shrank its primary budget by an even bigger 8.2 percentage points of GDP.

Austerity measures including income and property tax increases, a rise in value-added tax rates and cuts in wages and pensions, helped Athens reduce the gap from 15.6 percent of GDP in 2009.

“The distance covered from the 2009 deficit is big, we will soon have primary surpluses,” said Finance Minister Filippos Sachinidis after the data release.

“The need to continue fiscal consolidation and return public finances to a sustainable orbit will outline the country’s course in the years ahead,” he said.

FISCAL CORSET

State budget execution data so far in the first quarter suggest this year’s 6.7 percent deficit target could be in reach, helped by lower debt interest payments after a massive bond swap concluded last month. But the going will be tough.

“Considerable risks surround the execution of the general government budget this year, including the pace of economic contraction and any fiscal slippage ahead of the national election,” said economist Platon Monokroussos at EFG Eurobank.

Greece is set to pick a new government on May 6, with the two main parties in the current coalition seen barely securing a majority in parliament, according to the latest opinion polls.

Whoever wins the election will have to agree additional spending cuts of 5.5 percent of GDP or about 11 billion euros for 2013-2014 and gather about another 3 billion from better tax collection to keep getting aid, the IMF has said.

This is bound to be hard as the 215 billion euro economy is into a fifth consecutive year of recession, expected to contract by more than 4.8 percent in 2012.

Unemployment is also climbing to record highs, hitting tax receipts and requiring more spending on jobless benefits. The jobless rate hit 21.8 percent in January, with more young people are out of work than in.

Based on official figures, a record 1.08 million people were without work in January, 47 percent more than in the same month last year. Greece has slashed its minimum monthly wage by about a fifth to about 580 euros, gross, to encourage hirings.

Amidst the economic malaise the country’s twin deficits - the budget and current account gaps - have been coming down but more is expected to be needed to address the size of the public sector and its capacity to collect revenue.

The current account deficit, reflecting eroded competitiveness after years of above-productivity wage increases, shrank to 9.8 percent of GDP last year and is expected to drop to 7 percent in 2012.

Greece’s low share of exports in output, averaging 14 percent of GDP from 2007-11 excluding shipping, has stood in the way of a more rapid improvement.

The European Union and International Monetary Fund have placed strict conditions on Greece receiving bailout money to help it settle its massive debt requirements.

Greece’s statistics service said gross public debt rose to 165.3 percent of GDP last year from 145 percent in 2010.

Editing by Jeremy Gaunt.

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