An information note on the Medium-Term Fiscal Structural Program 2025-2028, recently presented by the Minister of National Economy and Finance Kostis Hatzidakis, and expected to be discussed tomorrow in the competent Committee of the Parliament, issued the Ministry of Finance.
Specifically, the information note, with the motto “Debt reduction, growth, income increase”, states the following:
1. What are the European fiscal rules and how do they differ from the Stability Pact?
It is essentially a revision of the Stability Pact, always within the context of the EU’s effort for low deficits and low public debt. And all this with specific sanctions for EU member states that do not fulfill the conditions.
The main new element is that the spending rule is introduced to control deficits and public debt in all member countries. Based on the analysis of the sustainability of the debt and the characteristics of each economy separately, the possibility of a certain percentage of increase in spending per year is given.
This rule allows the implementation of a counter-cyclical policy, as it provides the possibility of maintaining the annual rate of growth of expenditures both in periods of recovery and in periods of economic slowdown.
So the new rules allow the Greek government and other member country governments to keep spending stable even in times when the economy is not doing well. Within the framework of these rules, each country submits a four-year Medium-Term Budget-Structural Program which is approved by Brussels.
2. How will the Greek economy develop in the coming years according to the Medium-term Fiscal Structural Program 2025-2028?
The medium term reflects the course of the economy over the next four years. As the growth rate will consistently be among the highest in the EU:
- The public debt will decrease drastically, from 153.7% in 2024 to 133.4% by 2028. This reduction follows the drastic de-escalation of the debt-to-GDP ratio, from 207% in 2020 to 161.9% in 2023. , i.e. by 45 percentage points over three years. In 2028 Greece will not be the country with the highest debt in the EU.
- Unemployment will fall further to 8.5% in 2028, from 17.9% in 2019 and 9.5% in August 2024.
- Wages, both minimum and average, will increase further: The minimum wage from 650 euros in 2019 and 830 euros today is projected to be 950 euros in 2027. Correspondingly, the average wage from 1046 euros in 2019 and 1258 euros at the end of 2023 is predicted to reach 1500 euros in 2027.
The Medium Term incorporates the implementation of all the government’s pre-election commitments in 2023 and certifies that the government honors the mandate and trust of the Greek citizens.
3. What leeway do the new fiscal rules leave for the government to increase budget spending? Are there scopes for the exercise of social policy?
They exist, mainly due to the fact that the government, with the main argument of the overperformance of the budget in 2024, achieved a greater increase in spending compared to the initial proposals of the Commission.
In summary, spending from €100 billion in 2024 increases by around €3.7 billion in 2025 and 2026 and around €3.2 billion in 2027 and 2028. The increase in spending is broken down as follows:
- About €1 billion per year, on average, is the estimated increase in pensions based on new retirements and the increase based on inflation and GDP.
- Approximately 1 billion euros per year is estimated to be the usual increase in the regular expenses of the General Government bodies and ministries based on the assumed obligations and inflation (operating expenses, annual increase in pharmaceutical and hospital expenses, education expenses, etc.).
- Expenditure on the Armed Forces (equipment programs) is estimated to increase by €0.86 billion in 2025, an additional €0.48 billion in 2026, an additional €0.16 billion in 2027 and remain stable in 2028.
Consequently, there is a budgetary margin of up to 1 billion euros per year, on average, for the implementation of additional policy measures either on the expenditure side or on the revenue side.
4. Given that budget spending cannot increase beyond a certain limit, does the government have other tools to implement its policies?
Under the new rules, additional fiscal space for new initiatives is created by implementing permanent measures on either the revenue or expenditure side. For our country, in practice the fiscal space can result from the achievement of the objectives for the reduction of tax evasion and the review of public expenses (spending review).
In terms of tax evasion, the H1 2024 collection figures show that, without a tax increase, 10.3% more tax revenue was collected than in the first half of 2023, with inflation of around 3%. The additional revenue comes both from the growth of the economy, and from the limitation of tax evasion by promoting the interconnection of POS with cash registers. For 2027, with the further implementation of the measures to combat tax evasion, an increase in state revenues of the order of 2.5 billion euros is estimated.
In relation to the review of public expenditure, this will be implemented for example by targeting social and unemployment benefits, operational expenditure, general government and local government expenditure, etc.
5. Since any budget surplus will not be able to be distributed to citizens why is the government seeking higher surpluses?
The budget surplus – which reflects the economy’s surplus – can be used either for debt repayment or reserve creation (or apparently a combination of the two options).
In the first case, citizens benefit from the reduction of interest on public debt service.
In the second, money is secured to deal with emergencies that may arise in the future.
6. Should the government take additional measures in the coming years in order to achieve the primary surplus targets?
No. The primary surplus target for the whole period to 2028 is 2.4% of GDP (except for 2025 when 2.5% is forecast), which is the primary surplus the economy will achieve this year, according to our forecasts . So no additional measures are needed in the coming years.
The Greek economy has proven that it is able (as it is doing this year) to achieve reasonable primary surpluses that ensure the continuation of debt reduction. It is worth noting that with the previous fiscal framework the target for the primary surplus in 2025 would be 4% of GDP, so the new rules favor the country at this point.
7. The change in the method of recording in the debt for the deferred interest from the loans of the second memorandum is discussed. What impact would this have on medium-term assumptions and debt sustainability?
Basically, nothing changes. We are talking about the same debt known to Eurostat, the markets, investors and all Greek citizens. The difference is the distribution of the specific fund over time. That is, if the whole of 2032 will be recorded or if it will be spread over a period from 2012 onwards.
In either case, the course of debt reduction, nor the sustainability analysis, nor the financial needs of the Greek public, nor the amount of the allowed expenses, is not affected. After all, this year the country will prepay loans amounting to approximately 8 billion, which will contribute to the further reduction of the debt.
8. Why does the medium term predict lower growth rates compared to other organizations and international houses?
The medium term is based on a methodology somewhat reminiscent of that used in bank stress tests. It takes into account the worst-case scenarios to ensure that the fiscal targets will be met in any case. It is indicative that the medium-term scenario predicts a lower growth rate even than the Commission itself.
Specifically, it estimates a growth rate of 1.8% in 2025, while according to the Commission’s spring forecasts, growth next year will be 2.3%. So the EU itself appears on this issue with two different assessments, one conservative and one realistic. In addition, there are a number of estimates from domestic and foreign sources (Bank of Greece, EBRD, foreign banks, rating agencies) that approach the realistic scenario.
9. What are the structural changes included in the 4-year budget plan?
These are the changes concerning, among others, the following areas:
- Demographics: Additional protection for families with 3 or more children, tax credit for cash benefits in favor of new parents, reduction of insurance premium tax (15%) on private health policies for children.
- Housing: My Home 2 programme, local restrictions on short-term lettings incentives for long-term lettings of vacant homes.
- Tackling the consequences of the climate crisis: Investments in the prevention of fires and floods, reduction of the ENFIA for home insurance, increase in the perimeter of compulsory business insurance.
- Health: Recruitment of permanent medical and nursing staff, upgrading of hospitals, control of supplies.
- Upgrading the education system: Non-state universities, renovation of school buildings, vocational education-training programs.
- Limitation of tax evasion: Full application of “myDATA” and electronic invoices, digitization of controls, digital AADE. Limiting tax evasion will also allow for further reductions in times.
- Enhancing entrepreneurship: Incentives for research-development-mergers, establishment of the National Investment Fund, plan to expand greenhouses and support for young farmers.
- Spending review for a more rational allocation (Spending review).
10. In the end, with this Medium Term, will the economy go forward, or will it be under the pressure of the fiscal rules of Brussels?
The Greek economy is advancing at the second fastest pace in the EU (2nd quarter 2024 data). This positive course will continue, which will allow the convergence of the Greek economy with the EU average. The most important thing is that a series of positive developments will be combined: the large reduction of debt, the limitation of tax evasion, the coverage of the increased defense spending, strengthening the welfare state, reducing unemployment, reducing taxes and increasing incomes.
And this is because a prudent fiscal policy will be implemented, as it has been until now, while promoting a series of structural changes. Thus, at the end of the four-year period, the government will have fulfilled all of its pre-election commitments. Even more of the commitments regarding unemployment, wages and incomes.
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