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Exploding primary deficit sets limits to support measures

Greece's Finance Ministry is on red alert after the large spike in the primary budget deficit to 8.2 billion euros in July from 6.1 billion euros in June, making it more difficult to help support the economy and provide tax relief measures that are high on the government's agenda.

The derailment of the budget, which in relation to initial targets exceeds 9.5 billion euros and leads to a primary deficit of more than 5 percent of GDP at the end of the year, limits the room for new measures to support sectors and workers hit hardest by the pandemic. At the same time, a 3.6-billion-euro hole in tax revenues and increased spending of 4.6 billion euros between January-July narrow the fiscal space for the gradual lifting of the tax burden on the economy with reductions to social security contributions and taxes.

Of course, there are the golden cash reserves of 33 billion euros, but Finance Ministry officials are holding onto the funds in case of extraordinary and unpredictable developments in a bid to maintain the confidence shown by foreign investors in Greece. 

The decline in tax revenues in July was lower compared to June and May (15 percent vs 16.9 percent and 35.5 percent respectively). However, a poor performance in tourism, restaurant and trade sectors indicate that tax revenues will continue to drop off. Comments from deputy Finance Minister Theodoros Skylakakis point out that the global pandemic will continue to weigh on public revenues, until at least October - November 2020.

In addition to the deep recession that opens holes in government revenues due to falling turnover, mainly in sectors with a significant share of GDP, the concerns of Finance Ministry officials intensify as fears are expressed for a new generation of bad debts owed to the state, given that a large portion of taxpayers will be unable to meet their obligations thus leaving taxes unpaid. The first crash test for taxpayers' response to the payment of income tax is expected at the end of August, when the first two installments should have been paid. Taxpayers will have to pay 8.2 billion euros by the end of the year: 4 billion euros in income tax, 2.7 billion euros for the ENFIA property tax and at least 1.5 billion euros for road tax.

The second area of concern for the budget is the forced increase in spending to support businesses and workers, which it seems will not go away, at least not immediately. The growing number of coronavirus cases creates the need for new restrictive measures in a targeted lock down, which puts on the table the adoption of additional support measures and at the same time negatively affects government revenues.

In an effort to send a message to all in and out of Greece that the country's fiscal stability is not at stake and that the turmoil is temporary and justified by the critical situation, the Deputy Minister of Finance in a written statement-comment on the budget says that "expansionary fiscal policy throughout Europe and in Greece is a key tool in tackling the economic impact of the pandemic, through deferrals of tax liabilities and support expenditures for households and businesses."

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