Project Syndicate The Greek Budget Myth
November 27, 2013
By MARTIN FELDSTEIN
CAMBRIDGE Recently, newspaper headlines declared that Greece would have a
balanced budget for 2013 as a whole. The news came as quite a shock: Recall
that when Greek officials came clean about the true state of their
countrys public finances in 2010, the budget deficit was more than 10% of
GDP a moment of statistical honesty that triggered the eurozone debt
crisis. It seemed too good to be true that the Greek deficit would be
completely eliminated in just three years.
In fact, it is too good to be true. Any reader who went beyond the
headlines soon discovered that the prediction of a zero budget deficit was
in fact misleading. The International Monetary Fund was predicting only
that Greece would have a zero primary budget deficit in 2013.
A primary budget deficit (or surplus) is the difference between a
governments outlays for everything excluding the interest payments that it
must pay on its debt and its receipts from taxes and other charges. In the
case of Greece, the interest payments apply to government debt held by
Greek individuals and institutions, as well as to government debt held by
the IMF, the European Central Bank, and other foreign lenders.
The overall budget deficit is still predicted to be 4.1% of Greeces GDP in
2013 a substantial improvement compared to 2010 but still far from fiscal
balance. The difference between the overall deficit and the primary deficit
implies that the interest on the Greek national debt this year will be 4.1%
of GDP.
Moreover, the Greek governments interest payments are exceptionally low.
Given that its debt will still be about 170% of GDP this year, the
4.1%-of-GDP interest bill implies that the Greek government pays an average
interest rate of just 2.4% far less than the nearly 9% rate that the
market is now charging on ten-year Greek government bonds.
The difference reflects a combination of the lower rate on short-term debt
and the highly favorable terms on which Greece is now able to borrow from
official lenders at the IMF and the ECB. If Greece had to borrow at the
market interest rate on ten-year bonds, its deficit would rise by 6.5% of
the Greek government debt or 11% of GDP. In this case, the overall Greek
deficit would be about 15% of GDP, putting its debt on a rapidly exploding
path.
Greeces economic weakness increases the current level of the deficit. Five
years of declining GDP have depressed tax receipts and increased transfer
payments. The IMF estimates that these cyclical effects on revenue and
outlays have raised the overall deficit by nearly 5% of Greek GDP. On a
cyclically adjusted basis, Greeces overall budget would show a surplus of
0.6% of GDP this year.
This also implies that if Greece could escape from its current recession,
its national debt would decline, both absolutely and as a share of GDP.
More generally, the national debt of any country grows by the size of its
budget deficit or declines by the size of its budget surplus.
Even an economy with an overall budget deficit will have a declining
government debt/GDP ratio if the growth rate of its nominal GDP exceeds
that of its debt. For Greece, with an overall deficit of 4.1% of GDP and a
debt/GDP ratio of 170%, the debt ratio would fall if the combination of
inflation and real (inflation-adjusted) GDP growth exceeded 2.4%. Stated
differently, now that Greece has achieved a zero primary budget deficit,
its debt burden will decline if its nominal growth rate exceeds the average
interest that it pays on its government debt.
Budget deficits and the resulting national debt are important not only in
themselves; they also contribute to a countrys current-account deficit,
which is the difference between its level of domestic investment by
businesses and households in structures and equipment and the amount that
it saves to finance those investments. That amount, which includes the
saving of businesses and households, is reduced by the amount that the
government borrows.
In the case of Greece, the saving of businesses and households exceeds the
level of investment in businesses and housing by just enough to outweigh
the dissaving by the government, resulting in a very small current-account
surplus. Stated differently, Greece is now able to finance its current
level of consumption and investment, including government and private
spending, without relying on capital inflows from the rest of the world.
Looking ahead, the IMF predicts that Greece will have a gradually rising
primary surplus and a gradually declining overall deficit over the next
several years. But, unless Greece is able to increase its rate of economic
growth, the budget will remain in deficit and the debt will remain at
nearly its current share of GDP.
Martin Feldstein, a professor of economics at Harvard, was formerly
Chairman of President Ronald Reagans Council of Economic Advisors and
President of the National Bureau for Economic Research.
Copyright: Project Syndicate, 2013. www.project-syndicate.org
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12/2/2013
Received on Mon Dec 02 2013 - 13:49:40 EST
