Greece Needs Fiscal Breathing Room

We’ve exceeded our targets and ended up with a surplus. The wise thing to do would be to give it back to the citizens.

The Wall Street journal

By FRANCISCOS KOUTENTAKIS
Dec. 12, 2016 3:17 p.m. ET
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This will be the second year in a row that Greece has beaten its primary fiscal targets. In contrast to the pessimistic projections of its creditors, Greece’s authorities have proved themselves capable of delivering on the country’s promises.



A few factors worked in favor of this outcome. Targets were lower in the 2015 agreement with creditors, compared to previous programs. Revenue collection has improved. Spending discipline was reinforced. Economic performance has been better than expected. But this isn’t a reason to celebrate. Fiscal targets will soon increase, and there are still many uncertainties ahead. Nevertheless, the not-so-mainstream fiscal strategy of the present government, based on revenue gains rather than spending cuts, has proved successful—at least so far.

But is fiscal overperformance really a success? A fiscal target expresses a collective decision concerning the distribution between the public and the private sector. When there is a surplus, it means the public sector has extracted more resources out of the private sector than it has transferred into it.

Such fiscal overperformance is excessive austerity. The government took more fiscal measures than necessary and imposed an excessive negative effect on real economic activity. Less money in private pockets results in less private spending, lower economic activity and diminished growth rates. From both a political and an economic viewpoint, fiscal overperformance is more of a problem than a success.

Ahead of such an unfortunate event, any wise and honest government should reverse fiscal policy and refund this excessive surplus back to society. The question then is where this money should be transferred.

One option would be to clear arrears. However, the fiscal balance is measured in accrual terms, according to which spending on arrears is always offset by a corresponding reduction of obligations, rendering the entire exercise fiscally neutral. A government doesn’t need fiscal space to clear arrears, it only needs liquidity.

Another option is spending on public investment and infrastructure. This has the additional benefit of supporting public capital accumulation and raising aggregate productivity. This is a more supply-side friendly argument and sounds better to the ears of international investors. However, public investment requires planning, procedures and long-term financing beyond the fiscal performance of any one year. This leaves such plans susceptible to carry-over effects on future balances. Still, a government can use the available space to guarantee the full execution of the public investment budget.

A better option would be to spend on transfers to low-income individuals, those who have suffered the most during the crisis. This is a fair objective that can also be justified on efficiency grounds: Low-income individuals have a higher propensity to consume. The boost to private economic activity would be substantial.

The transfer must be carefully designed and implemented as a strictly one-off intervention without negative carry-over effects on future fiscal balances. Otherwise it could distort the agreed-upon fiscal path and raise concerns from creditors.


Successfully implementing such a delicate exercise could enhance the credibility of the Greek fiscal authorities far more than any accounting overperformance. The government has fully honored its agreement with its creditors and continues to do so. It is equally important to honor its implicit agreement with the private sector and help restore the credibility of the Greek state in the eyes of its citizens. The refund of the excessive surplus back to society would be an excellent step to this direction.

Mr. Koutentakis is the general secretary for fiscal policy in Greece’s ministry of finance.