The main target of the Medium-term Adjustment Programme, on which the realisation of the other macroeconomic objectives depends, is the reduction of the PSBR from 21 per cent of GDP in 1990 to 3 per cent of GDP in 1993. This improvement reflects a marked decline in the primary deficit, by 16 percentage points of GDP, and a fall in the interest payments/GDP ratio by 2 percentage points of GDP. The borrowing requirement of public enterprises (1.7 per cent of GDP in 1990) is planned to be eliminated by 1993 and that of the general government be reduced from 19.1 per cent of GDP in 1990 to 3 per cent of GDP. Two-thirds of the officially-planned improvement in the general government deficit as a per cent of GDP is expected to come from increases in revenues (including privatisation receipts) and one-third from the reduction in expenditure.
The Annex illustrates the impact of the Adjustment Programme, which is taken as the baseline. The simulation traces out real and nominal developments based on unchanged fiscal policy (i.e. in the absence of the Adjustment Programme) and on the assumption that the general government's primary deficit as a per cent of GDP would remain constant. Given the large schocks the simulation results (the alternative scenario) do not purport to show precise figures but only broad orders of magnitude. In addition to the assumption that general government revenues and non-interest expenditure as a per cent of GDP would remain constant at their 1990 level, it is assumed that the monetary authorities would not accommodate the increase (compared with the baseline) in the government deficit. Hence, in the alternative scenario, both money supply and the nominal exchange rate are the same as in the Adjustment Programme. This assumption would seem to be consistent with the stated aim of not compensating for any slippage in fiscal policy.
The main differences between the alternative scenario and the baseline are illustrated in the following table. In the short-run, higher public expenditure combined with lower taxes would boost real consumption, thus permitting output to be higher than in the Adjustment Programme. Interest payments on public debt would also be larger. However, output gains would not only be small, but also temporary. The alternative scenario produces higher inflation and nominal income, which, coupled with the non-accommodating monetary policy stance, would lead to higher nominal and real interest rates and a worsening in external competitiveness. Accordingly, the faster growth in consumption would be largely offset by lower investment and a deterioration in net exports, compared with the planned recovery in the Adjustment Programme. All these factors should also depress the growth potential, thus constraining the actual growth of output even beyond 1993.
In the medium-run, the negative supply-side effects, mainly related to lower investment and export trends, would outweigh the expansionary effects of fiscal policy on consumption, thus resulting in output losses. Internal and external imbalances would also deteriorate significantly further. Public debt would rise by 10 percentage points of GDP. Given the high starting level, the debt/GDP ratio changes slowly despite the successive high PSBRs.
To sum up, maintaining the primary deficit at its 1990 level would set in motion a perverse dynamic process of debt-accumulation, whereby interest payments would widen the public deficit, push up interest rates and further depress investment and potential output while boosting inflation.
The alternative scenario's nominal and real developments are the mechanical results of the use of the Interlink model. The model does not take into account confidence factors, which, given the substantial imbalances in the Greek case, are likely to have strong negative effects on output, inflation and the balance of payments as early as 1991. The interaction of these factors would make for a much worse outcome than shown in the alternative scenario, with the PSBR probably rising to 25 per cent of GDP by 1993, inflation remaining in the 20 per cent range and the current external account maintained at about 5 per cent of GDP while output growth could come to a virtual standstill before 1993. [Tabular Data Omitted]
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|Title Annotation:||Greece; Annex I|
|Publication:||OECD Economic Surveys - Greece|
|Date:||Jun 1, 1991|
|Next Article:||Chronology of main economic events, 1990.|