By Lucy Parsons, Senior Economics Researcher, Reform
Last week the Greek Finance Minister, George Papaconstantinou, broadcast a live cabinet presentation on Greek television of the government’s plans for reducing Greece’s budget deficit. The following day the Greek government submitted its stability and growth plan to the European Commission setting out these proposals. The UK should be taking notes.
The downgrading of Greece’s credit rating has resulted in a hike in interest rates. This does not only increase borrowing costs for the government and individuals, but also holds back economic recovery as firms cannot afford the capital to expand their businesses and hire more staff.
With a budget deficit running at 12.7 per cent of GDP and national debt totalling over 120 per cent of GDP, the Greeks certainly have a public finance tragedy on their hands. But the UK is not a million miles apart. Government borrowing for 2009-10 is expected to be 12.6 per cent of GDP and 12.0 per cent of GDP in 2010-11. Net debt is forecast to reach nearly 80 per cent of GDP by 2014-15 – even if we believe the overly optimistic projections of growth made by the Treasury. The Pre-Budget Report put the cost of servicing the UK’s national debt at £30 billion this year, with the same level of borrowing expected in 2010-11.
There are also similarities between the shape of the UK and Greek economies. The strong growth of the Greek economy in the 1990s and early 2000s was, like the British, built largely on the expansion of cheap credit and a growing banking sector. Neither is likely to recover to pre-crisis levels for some time.
The political response to the Greek crisis is one the UK would do well to pay attention to. The international financial markets have made it clear that a credible plan to reduce the budget deficit is the only way Greece’s politicians can restore confidence. Having come to power in October on a pledge to spend its way out of the recession, the Socialist party is being forced to draw heavily on its political capital to change tack. The revelation that the previous government had falsified the public finance figures for years to paint a rosier picture has added to the collapse of Greece’s credibility.
The new government has acted quickly, pledging to cut the budget deficit from 12.7 per cent of GDP in 2009 to the 3 per cent of GDP level set by the Maastricht Treaty by 2012. This is an enormous challenge and a fiscal tightening of this scale is not likely to be achievable. But the aim is to show that the government is serious on restoring the public finances. The stability and growth programme was submitted to the European Commission two weeks earlier than agreed and is a substantial document setting out detailed and costed measures for restoring fiscal and economic stability.
The focus of the consolidation plan is on cutting public spending and reforming the tax system. The measures include a real terms reduction of public sector pay, a reduction in public sector headcount (mainly relying on natural wastage) and reform of the social security system. Total spending will be cut by 4.7 per cent of GDP – equivalent to about £66 billion for the UK – in the next 4 years.
In an interview with the FT, Greek Finance Minister explained succinctly why governments should be making plans for restoring the health of the public finances – it is the citizens of a country who bear the burden of high deficits and debt.
