Draft Budgetary Plan 2021
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HELLENIC REPUBLIC Ministry of Finance DRAFT BUDGETARY PLAN 2021 October 2020 1 CONTENTS Introduction ....................................................................................................................................... 3 Executive summary............................................................................................................................ 4 1 Macroeconomic forecasts .................................................................................................................. 6 1. 1 Macroeconomic developments in 2020 ..................................................................................... 6 1.2 Macroeconomic developments in 2021 .................................................................................... 16 2 Budgetary targets ............................................................................................................................. 20 2.1 Fiscal developments .................................................................................................................. 20 2.2 Debt developments ................................................................................................................... 21 2.3. Comparison with latest Stability Program (April 2020) ............................................................ 22 3 Expenditure & Revenue projections ................................................................................................. 23 3.1 Expenditure and revenue projections ....................................................................................... 23 3.2 Discretionary measures ............................................................................................................. 24 3.3 Recovery and Resilience Facility (RRF) ...................................................................................... 28 4 Distributional impact of the main revenue and expenditure maesures .......................................... 30 Methodology ................................................................................................................................... 30 Results ............................................................................................................................................. 31 5 Union’s strategy for growth and jobs targets and country specific recommendations ................... 34 6 ANNEX ............................................................................................................................................... 72 DBP tables ........................................................................................................................................ 72 Measures tables .............................................................................................................................. 76 2 Introduction Regulation (EU) 473/2013 of the European Parliament and of the Council (part of the so-called ‘Two- pack’) introduces a common budgetary timeline for Euro area Member States. Specifically, Draft Budgetary Plans for the forthcoming year must be submitted to the European Commission and to the Eurogroup by October 15thof each year. The document herein is being submitted to the European Commission and the Eurogroup in accordance with the Regulation. The format and content of the document are in line with the requirements of the Two pack Code of Conduct which inter alia, requires macroeconomic and budgetary forecasts for the current and forthcoming year (in this case 2020 and 2021). The macroeconomic forecasts used for this year and next were endorsed by the Hellenic Fiscal Council (HFC) as required under article 4(4) of the Regulation. In addition to the activation of the general escape clause of the Stability and Growth Pact as a result of the pandemic, regarding any possible temporary violations of the Greek fiscal rules and the Greek budgetary framework in general, the “extraordinary circumstances” clauses of articles 37.3 and 38.2 of L.4270/2014 will be relied on. All data presented, are on ESA 2010 statistical basis. 3 Executive summary Real GDP in the current year is estimated to decrease by 8.2% due to the effects of the COVID-19 pandemic. The recession is mainly driven by the economic activity downturn during the second quarter of the year, reflecting the total lockdown in several sectors in Greece as well as globally. It would have been much larger, if the Greek government had not undertaken all the interventions it has, for supporting the national health system and all the crisis-affected sectors of the economy and the employees, as described below. Domestic demand is expected to have larger negative contribution to the GDP evolution over the year in comparison to the external sector of the economy, explaining around 60% of the recession. Real private consumption is estimated to decrease by 6% relatively to 2019, in mid of a reduction of total employment by 4.7%. Real gross fixed capital formation is expected to experience further losses over the second semester of the year, showing a total annual reduction by 10.9% compared to 2019. Exports of services are expected to experience a severe reduction over the year by 45.4% mainly due to the tourism effect. Given the uncertainty of all projections due to the pandemic and how it will evolve in 2021, real GDP is expected to regain 83.2% of its losses in 2020, reaching a level lower by 1.4 percentage points of 2019, with a growth rate of 7.5%. In 2021, all components of domestic demand except public consumption - which is expected to decrease by 1.8% due to the very high expenditures of 2020 for treating the pandemic - are expected to contribute to regaining the lost dynamic of the current year. Real private consumption is expected to benefit from the positive perspectives of the labor market and increase by 5.8% compared to 2020. The contribution of the resources from the Recovery and Resilience Facility is expected to reach 2% of GDP in 2021. For real gross fixed capital formation the smooth and timely absorption of the RRF resources is a key in order to approach the private consumption contribution to the GDP of 2021, with an annual rate of increase at 30.4%. Unemployment is estimated at 16.5%, improved by 2.1 percentage points compared to 2020, as the number of unemployed will decrease in 2021 and the number of employed will increase, in terms of employees as well as self-employed. Inflation in 2021 is estimated to increase slightly due to enhanced demand, at 0.6% in comparison to 2020 (based on the Harmonized CPI), contributing to the average real wage increase by 0.9% at an annual basis. In 2019, Greece, for the fourth consecutive year, registered a surplus in the headline budget balance of 1.5% of GDP, while the primary balance1 reached 4.4% of GDP. 1 Primary Balance is reported in ESA 2010 terms; under enhanced surveillance definition reached 3.5% of GDP. 4 For 2020, the headline budget balance and the primary balance2 are estimated at -8.6% and -5.7% of GDP, respectively due to the aforementioned developments. For 2021, the headline budget balance and the primary balance2 are estimated at -3.9% and -1.3% of GDP, respectively. 2Primary Balance is reported in ESA 2010 terms which differs compared to enhanced surveillance definition. 5 1 Macroeconomic forecasts 1. 1 Macroeconomic developments in 2020 At the threshold of 2020, strong acceleration dynamics existed for the growth prospects of the Greek economy, as a result of the new economic policy implemented from the second half of 2019. The new policy targeting had quickly strengthened the expectations of businesses and households, the liquidity conditions of the economy and the international environment’s confidence on the achievement of fiscal and reform targets in Greece. Whithin the second half of 2019, 53.7% of the positive contribution of private consumption and 86% of the positive contribution of investment to the annual output growth were accomplished, along with the offsetting of the negative contribution of net exports of goods of the first half of the year, from -0.8 to +0.8 percentage points of GDP. The acceleration of investment towards the end of 2019 reflects the early benefits of the new policy orientation in Greece towards closing the investment gap. The annual increase of investment by 4.5% demonstrates the robust dynamics of the last two quarters of 2019, during which gross fixed capital formation increased by 8.1% compared to the corresponding six-month period of 2018. The above development was one of the key drivers of the 1.9% annual growth rate of the whole of year, along with the strengthening of active demand and the expansion of net export growth by 0.3 percentage points of GDP (compared to the latter’s shrinking by 0.9 points of GDP in the first half of the year). Another important driver of output growth in 2019 was the surge in total and dependent employment (by 2.0% and 4.0%, respectively, compared to 1.7% and 2.3% in the previous year), unlike the decrease in the number of the self-employed. The statistical recording of a more subdued GDP growth rate in the second half of 2019 with respect to the previous semester (1.6% vs. 2.1%, respectively), does not signal a weakening of economic growth dynamics, but rather it is due to the economy's decreasing inventories, amid rising domestic demand, and to the adjustment of real public consumption after its sharp increase by 6.3% quarter on quarter at the end of the first half of 2019, linked to the election cycle. Against this backdrop,