The Costs of Delaying fiscal Consolidation: A Case Study for Greece

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The Costs of Delaying fiscal Consolidation: A Case Study for Greece

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Vassiliki Koutsogeorgopoulou
David Turner ()

Abstract

Since 2004, the fiscal deficit has been brought down by over 5% of GDP to below the 3% limit in 2006, which is a major achievement. The government plans a more gradual reduction over coming years so that overall balance or surplus is reached no later than 2010. However, fiscal consolidation should continue, possibly at a more rapid pace than planned, given the high level of government debt, favourable outlook for output growth, and long-term fiscal costs of ageing which are estimated to be among the largest in the OECD. There are as yet no specific proposals to reform pensions, which account for most of the prospective ageing-related increase in public expenditure, although the government is expected to announce reforms following the publication of a report from a Committee of Experts. Delaying fiscal consolidation, particularly the urgently needed pension reform, would have substantial longer-term costs in terms of higher taxes and additional debt service costs, including an increase in the risk premium paid on government debt. In addition, this would heavily skew the tax burden towards future generations. Consolidation should focus on reducing primary spending and on enhancing tax revenues. This can be achieved particularly through increased efficiency of public administration and by measures to tackle tax evasion and further broaden the tax base. Ensuring long-run fiscal sustainability will also require the implementation of wide-ranging reforms in the key area of health care, as well as an early decision to introduce a comprehensive reform of the pension system.

Les coûts d’un report de la consolidation budgétaire : une étude dans le cas de la Grèce
La réduction du déficit budgétaire, ramené de 5 % du PIB en 2004 à moins de 3 % en 2006, est une réussite majeure. Les autorités prévoient une diminution plus progressive dans les prochaines années jusqu’à ce que le budget soit en équilibre ou excédentaire, au plus tard en 2010. Cependant, l’assainissement budgétaire devrait se poursuivre – peut-être à un rythme plus rapide que prévu - étant donné le niveau élevé de la dette publique, les perspectives favorables à la croissance de la production et les coûts budgétaires à long terme du vieillissement, qui sont parmi les plus élevés de la zone OCDE. Il n’est pas encore prévu d’initiatives spécifiques pour réformer les retraites, principale source de l’accroissement prévisible des dépenses publiques résultant du vieillissement, même si le gouvernement doit annoncer des mesures dans le courant de cette année. Différer l’assainissement des finances publiques, surtout la réforme des retraites qui s’impose d’urgence, entraînerait des coûts à long terme considérables sous forme d’une hausse de la fiscalité et d’un alourdissement du service de la dette, avec notamment une augmentation de la prime de risque appliquée à la dette publique. De surcroît, ceci reviendrait à transférer une lourde charge fiscale aux générations futures. Les efforts d’assainissement devraient tendre surtout à réduire les dépenses primaires et accroître les recettes fiscales. On peut y parvenir par l’amélioration de l’efficacité de l’administration publique en particulier, et en luttant contre la fraude et en prenant d’autres mesures pour élargir la base d’imposition. Pour garantir la viabilité budgétaire à long terme, il faudra aussi engager des réformes d’envergure dans le secteur clé de la santé et décider promptement de lancer une réforme complète du système de retraite.

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Paper provided by OECD Economics Department in its series OECD Economics Department Working Papers with number 582.

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Date of creation: 18 Oct 2007
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Handle: RePEc:oec:ecoaaa:582-en

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Find related papers by JEL classification:
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-10-27 (All new papers)
NEP-EEC-2007-10-27 (European Economics)
NEP-PBE-2007-10-27 (Public Economics)

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