It lowers the bar on forecasts for the pace of the economy developmenttogether with Greece’s tax revenues – while warning of the possibility of new measures to increase the latter or reduce public expenditure – the European Fiscal Council (which is under the Commission) in its 2025 annual report.
Compared to the Commission’s previous directives, the plan (according to the Greek Ministry of Finance) aims at a lower level of fiscal ambition based on significantly more optimistic medium-term growth prospects combined with a lower elasticity of public revenues in relation to GDP, the same report states.
It is noted that this configuration entails the risk of not achieving the fiscal goals even when the proposed spending path is followed.
The European Fiscal Council’s report says the plan’s use of more optimistic macroeconomic projections, based on more recent forecasts or high-frequency data, is reminiscent of the uncertainty surrounding real-time estimates of potential output and the output gap that has been criticized in the past.
A more prudent approach would seem appropriate, especially since short-term errors will be trapped in the medium term, he notes. Nevertheless, the Commission is of the opinion that Greece’s plan meets the requirements of Regulation (EU) 2024/1263.
In addition, the discretionary measures set out in the draft fiscal plan for 2025 appear to worsen the deficit and jeopardize the achievement of the plan’s targets in that year.
Macroeconomic forecasts
The estimates of the plan for nominal GDP growth are significantly more optimistic than the estimates on which the Commission’s previous directives were based, emphasizes the European Fiscal Council.
Greek authorities explain the forecast for stronger growth with a different assessment of the economic cycle.
They also emphasize that their macroeconomic outlook is more up-to-date and consistent with the forecasts of the OECD and the Bank of Greece.
Total factor productivity is expected to recover after a protracted economic crisis spanning from the Great Recession of 2008-09 to the pandemic.
In the same report it is emphasized that it is not entirely clear whether the expected impact of the reforms presented in the plan is included in the macroeconomic scenario.
The plan details gains in total factor productivity between 2026 and 2028 and refers to “upside risks” linked to the completion of policy reforms and investment, including measures set out in the national recovery and resilience plan.
In December 2024, the Economic Sentiment Index (ESI) was on a downward trend, on a seasonally adjusted basis, and significantly lower than in May, when the Commission completed its spring forecasts and prepared the reference path for Greece.
As of November 2024, the industrial production index has not changed significantly from May’s figures, despite some volatility. This raises some concerns about the short-term outlook for 2024 and 2025 in the plan.
More generally, framing a medium-term fiscal plan around improvements in rolling forecasts or high-frequency data is reminiscent of the uncertainty surrounding real-time estimates of potential output and the output gap that has clouded fiscal surveillance in the past.
Public finances and the course of net spending
Greece’s debt-to-GDP ratio is the highest in the EU. However, from a peak of 209.4% in 2020, it has fallen to 161.9% in 2023.
The national accounts reporting revision between April 2024 and the October 2024 notification increased the debt ratio by 2 percentage points, as it included deferred interest on EFSF loans, which was partially mitigated by an upward revision of nominal GDP.
At 34%, Greece’s numerical average score for compliance with Stability Pact rules over the period 1998-2023 is the fourth lowest in the EU.
However, compliance improved from 2011-2023 after Greece exited the bailout program in June 2018.
Underpinned by more optimistic macroeconomic projections, the plan aims for a less demanding spending path than the Commission’s reference path: an average annual growth rate of 3.3% versus 3.1% in 2025-2028.
The corresponding average annual fiscal adjustment – as measured by the change in the structural primary budget balance – is lower in the plan.
The course of adaptation of the plan is linear. It is worth noting that the annual fiscal adjustment of the structural primary budget balance implied by the Commission’s reference path is on average 0.22 percentage points of GDP: 0.4 percentage points in 2025 and 0.16 percentage points annually between 2026 and 2028.
The correction of 0.4 percentage points for 2025 was triggered by an expected nominal structural deficit of 1.7% of GDP in 2024, which triggers the deficit sustainability safeguard.
Thanks to the higher growth prospects, the plan estimates the nominal structural deficit to be 1.48% of GDP, just below the resilience margin of 1.5%.
The Commission’s forecasts for autumn 2024 predict a structural deficit of 1.3% of GDP, which is within the resilience margin.
The plan offers some clues about the fiscal strategy to achieve the planned adjustment. It expresses the ambition to base its fiscal strategy on both the revenue and expenditure sides. However, the exact measures governing the adjustment course are neither detailed nor quantified.
Greece’s draft budget for 2025 includes both discretionary measures consisting of revenue reductions and spending cuts in some categories and increases in others.
Overall, these measures are estimated to reduce revenue by 0.3% of GDP and increase spending by 0.1% of GDP.
The plan justifies the lack of detail on fiscal measures with an emphasis on structural reforms. As a result, additional fiscal measures are likely to be needed to achieve adjustment in 2025, the European Fiscal Council’s 2025 report highlights.
In the plan, the debt-to-GDP ratio remains on a downward trajectory. This is similar to the Commission’s previous guidance, but is based on a lower fiscal adjustment combined with higher potential nominal growth.
According to the plan, annual nationally financed public investment is expected to reach an average of 3.6% of GDP over the period 2025-2028. The plan assumes a lower elasticity of revenue to potential GDP (equal to 0.825) than the single assumption recommended by the Commission, based on the empirical literature and revenue results of recent years.
While on the face of it this may seem like a more prudent assumption, it implies less ambitious deficit targets and creates potential room for new revenue measures.
The Commission concludes that the Greek plan meets the requirements of Regulation (EU) 2024/1263.
The Commission’s assessment explains the difference between the plan and its previous guidance with a better starting position in terms of the structural primary balance in 2024.
The Commission accepts the plans’ rationale that a lower revenue elasticity – a deviation which, according to its own guidelines, it did not intend to accept – balances the higher assumptions about possible GDP growth.
It also concludes that case differences, taken together, lead to an average net increase in plan spending that is higher than the baseline.
The Council’s overall conclusions take into account the Commission’s assessment. Specifically, the Council “recognizes that, according to the Commission’s assessment, the difference between the course of net expenditure in the plan and the course of reference is solely due to the update of the initial budgetary position”. Therefore, the Council appears to be underestimating the role of optimistic forecasts of potential growth in achieving a more relaxed spending path in 2025 and 2026, the same report stresses.