High primary surplus enhances credibility of fiscal adjustment, National Bank analysis says

A high primary surplus reported by the Greek government enhances the credibility of fiscal adjustment ahead of completion of a third bailout program, National Bank said in an analysis released on Wednesday.

The high primary surplus totaling 4.2 pct of GDP in 2017, more than double of the program’s target for the year, up from 3.8 pct in 2016 and 0.6 pct in 2015, underlined a consistent progress in fiscal adjustment, National Bank’s analysts said. They noted that the social insurance system recorded an expanded surplus in 2017, for the second successive year, amounting to 1.7 pct of GDP from 1.2 pct of GDP in 2016 and a deficit of 0.3 pct of GDP in 2015. This improvement reflected both positive trend in revenues of social insurance agencies and a reduction in spending. These trends are projected to continue in the 2018-2019 period.

The analysis noted that a recovery in employment (accompanied by increased social contributions by both workers and employers -0.15 pct of GDP) also helped to raise revenue, along with more favourable debt settlement measures. It stressed that maintaining a positive dynamism in the leg of contribution revenue in the coming years will depend on improving conditions in the domestic labour market, combined with a gradual increase in wages expected to begin in 2018. Spending by the social insurance system fell by 0.3 pct of GDP in 2017.

The state surplus was almost unchanged in 2017 to 2.1 pct of GDP from 2.2 pct in 2016, reflecting a credible control of spending. Tax revenue were almost unchanged in absolute terms (but fell 0.15 pct of GDP on an annual basis excluding revenue from settlement of older debt). VAT revenue remained a reliable part of tax revenue growing by an annual 5.5 pct in 2017, an encouraging trend which continues in the first quarter of 2018, contributing in achieving a target for a primary surplus of at least 3.5 pct of GDP in 2018.

The analysis said that the given the hyper-surplus of 2017 (4.2 pct of GDP) the net impact of fiscal policy on economic activity in the country will not be contracting in 2018 -for the first time in the last eight years. Also, the higher surplus leads to a net contribution of at least 2.7 billion euros in the cash buffer accumulated by the Greek state ahead of completion of the third bailout program. It also helps to keep the country’s public debt in a declining trend.