Debt Reduction, Economic Growth, and Income Increase: Key Insights from the Medium-Term Programme in 10 Q&As

In a recent Q&A, the Ministry of Finance outlined key aspects of the Greek economy’s future based on the Mid-term Fiscal Plan for 2025-2028. This plan details structural changes and projections for the economy over the next four years. Here are the highlights:

1. What are the European fiscal rules and how do they differ from the Stability Pact?

The new European fiscal rules are a revision of the Stability Pact, reflecting the EU’s commitment to maintaining low deficits and public debt. They introduce a spending rule to control deficits across member states, allowing for a specific rate of annual spending growth based on debt sustainability analyses. This flexibility enables governments to maintain expenditure during both economic recovery and downturns, ensuring stability even in challenging times. Countries must submit a four-year medium-term fiscal-structural program for approval by Brussels.

2. How will the Greek economy develop according to the Medium-Term Fiscal Plan for 2025-2028?

The plan forecasts a robust economic trajectory for Greece:

• Debt Reduction: Government debt is expected to decrease significantly from 153.7% of GDP in 2024 to 133.4% by 2028, following a drop from 207% in 2020 to 161.9% in 2023.
• Unemployment: Projected to fall to 8.5% by 2028, down from 17.9% in 2019 and 9.5% in August 2024.
• Wage Growth: The minimum wage is set to rise from €830 today to €950 by 2027, while the average wage is expected to increase from €1,258 to €1,500 over the same period.

This medium-term plan reflects the government’s commitment to fulfilling its electoral promises while maintaining economic stability.

3. What fiscal flexibility exists for the government to increase budget spending, especially for social policies?

The government has room for increased spending due to the over-performance of the budget in 2024. In total, the budget for 2024 will be €100 billion, with increases of €3.7 billion planned for 2025 and 2026, and €3.2 billion for 2027 and 2028. Notably:

• Pensions are set to increase by approximately €1 billion per year due to new retirements and inflation adjustments.
• Regular expenditures for government agencies will also rise by around €1 billion annually, accommodating commitments and inflation.
• Armed Forces spending will increase by about €860 million in 2025 and stabilize in the following years.

This creates a fiscal space of up to €1 billion annually for additional social policy measures.

4. How can the government implement policies if budget expenditures are capped?

Under the new fiscal rules, the government can create fiscal space for new initiatives by focusing on revenue-generating measures and expenditure reviews. For instance, efforts to reduce tax evasion have led to a 10.3% increase in tax revenue in the first half of 2024 compared to 2023. Implementing further anti-tax evasion measures could generate an additional €2.5 billion by 2027.

5. Why is the government pursuing higher budget surpluses despite restrictions on distributing them to citizens?

Higher budget surpluses can either be used to reduce public debt or build reserves for future emergencies. Both options benefit citizens indirectly, either through lower interest payments on debt or by securing funds for unexpected challenges.

6. Will additional measures be required to meet primary surplus targets in the coming years?

No additional measures are necessary. The primary surplus target remains stable at 2.4% of GDP through 2028, aligning with the surpluses the economy is currently projected to achieve. This marks a significant improvement compared to previous targets.

7. How would changes to the recording of deferred interest on loans impact debt sustainability?

There would be no significant impact. The same debt figures will be recognized; the difference lies in the timing of recording specific funds. The Greek government is also set to prepay around €8 billion in loans this year, further supporting debt reduction.

8. Why are the growth projections lower than those of other agencies?

The medium-term forecasts are conservatively designed to ensure fiscal targets are met, even under adverse scenarios. The estimated growth rate of 1.8% for 2025 is more cautious compared to the 2.3% projected by the European Commission, reflecting a prudent approach to economic planning.

9. What structural changes are included in the four-year fiscal plan?

The plan introduces several important structural changes, including:

• Demographic support: Additional protections for families with three or more children, tax credits for new parents, and reduced premium taxes for private health policies for children.
• Housing: Expansion of the “My House 2” program and incentives for long-term rentals.
• Climate resilience: Investments in fire and flood prevention and increased mandatory insurance for businesses.
• Healthcare improvements: Hiring permanent medical staff and upgrading hospitals.
• Education upgrades: Non-state universities and renovations of school facilities.
• Tax evasion measures: Implementation of electronic invoicing and digital audits to reduce tax evasion and lower tax rates.
• Entrepreneurial incentives: Support for research, development, and investment in agriculture.

10. Will the economy progress or face pressure from EU fiscal rules?

The Greek economy is set to continue its robust growth, making it the second fastest-growing in the EU as of Q2 2024. This positive outlook is supported by reduced debt, enhanced tax compliance, increased defense spending, and strengthened welfare initiatives. A careful fiscal policy, combined with structural reforms, will ensure that the government fulfills its electoral commitments, particularly regarding unemployment, wages, and income growth.

The post Debt Reduction, Economic Growth, and Income Increase: Key Insights from the Medium-Term Programme in 10 Q&As appeared first on ProtoThema English.