Greece: Budget 2024 sets mostly realistic targets, focuses on policy continuity

• Macroeconomic framework is on the optimistic side, but we think the fiscal targets are achievable even if economic activity disappoints

• The fiscal targets of the budget seem prudent, expenditure growth is reduced and kept below revenue growth

• Total financing needs are EUR 9.54bn, which is lower than the financing needs in 2023

• Tax policy remains nearly unchanged, discretionary spending focuses on income-boosting measures

• Biggest risks to the budget are lower-than-projected economic activity and a repeat of 2023's damage caused by natural disasters

On 21 November the Greek government submitted the second and final version of State Budget 2024 to parliament. The second version contains minimal changes compared to the first, only slightly amending some aspects of the macroeconomic forecasts and shifting some more spending towards education and healthcare. Budget 2024 is the first to include hikes to wages in the civil service in 14 years and has a large focus on income-boosting measures, mainly in the social policy sphere.

Due to some fiscal constraints, the plan of the ruling party New Democracy to cut social security contributions once again has been delayed by a year, but overall tax policy remains consistent, with no significant changes. Fiscal consolidation efforts continue, with the government setting a primary surplus target equal to 2.1% of GDP in 2024. Overall, the word best describing Budget 2024 is "continuity" - following the convincing victory in this year's election, the ruling party ND is maintaining its fiscal approach nearly unchanged.

Macroeconomic framework

The government projects that GDP growth will accelerate to 2.9% in 2024 from 2.4% in 2023. Private consumption growth is set to substantially slow down to 1.3% y/y next year from 2.9% y/y in 2023, but on the other hand, gross fixed capital formation growth is projected to more than double to 15.1% in 2024. We note that the GFCF growth forecast was revised upwards from the initial draft of the budget, submitted in October when the government projected 12.1% growth. Both export and import growth are projected to also accelerate in 2024, after the substantial slowdown in 2023.

Overall, investments are expected to be the main driver of growth in 2024 by a considerable margin, which places a lot of emphasis on the timely and efficient execution of the state's capital spending, especially Recovery and Resilience Plan (PRR) projects. The Greek government has so far done a good job at that, but the jump in GFCF growth that is being projected is quite substantial, and even a small hiccup or delay in the execution of the PRR could jeopardize the forecast. We note that the government's GDP forecast is more optimistic than those of the IMF and the EC and even compared to domestic think tanks such as the IOBE. All of those institutions also expect GDP growth to slow down in 2024, rather than accelerate.

Budget 2024 also projects that HICP inflation will ease to 2.6% in 2024 from 4.1% in 2023, while the unemployment rate drops to 10.6% in 2024 from 11.2% in the current year. These figures are broadly in line with the latest forecasts of the IMF and the EC, and if anything, we think that unemployment is likely to drop further, possibly averaging even below 10% in 2024.

Fiscal framework

The government has set a primary surplus target equal to 2.1% of GDP (EUR 4.99bn) in 2024, up from 1.1% of GDP (EUR 2.55bn) in 2023. The overall budget balance is expected to be at a deficit of 1.1% of GDP in 2024, down from 2.1% in 2024. The ratio of general government debt to GDP is projected to fall to 152.3% in 2024 from 160.3% in 2023. These targets are all broadly in line with the projections of other institutions, including the IMF's Fiscal Monitor. The government is projecting that overall budget revenues will increase by 4.9% to EUR 68.4bn in 2024, while expenditures rise by 2.4% to EUR 74.6bn. Tax revenue is projected to reach EUR 62.96bn in 2024, rising by 2.66%.

Overall, we find these fiscal targets realistic. They can most likely be achieved even if GDP growth is below the government's expectations and closer to those of the EC, the IMF and the IOBE (in the 2-2.4% range). The expected growth in tax revenue for 2024 is much lower than the 9.2% estimate for 2023, which is appropriate, given the gradual dissipation of the inflationary boost to nominal revenue figures that the state budget has been enjoying for the past two years. Importantly, the government is also planning to decelerate spending growth by about 1.5pps and is keeping it below total revenue growth. We think the budget outline is relatively prudent and appropriate to the macroeconomic situation.

The total financing needs of State Budget 2024 add up to EUR 9.54bn. The deficit on a cash basis will be roughly EUR 3.0bn. Some EUR 5.4bn from the total financing needs are for repaying old bonds, thus the net financing needs for 2024 are just EUR 4.0bn. The government plans to cover EUR 9.0bn of the total financing needs through medium and long-term borrowing, while the remaining EUR 539mn will be taken out from the state's ample cash reserves. In 2023 Greece raised about EUR 11.25bn through bond auctions, thus next year's plan is more limited.

This is appropriate in our view, given the prevailing tight monetary policy environment and high level of interest rates. It is uncertain exactly when the European Central Bank will start cutting rates again, so financing plans should definitely not be expanding in 2024, in our view. We note that the medium and long-term borrowing includes expected RRF loans. Overall, the government's continued efforts towards fiscal consolidation and debt reduction are apparent in the fiscal framework adopted for 2024, which is more restrained in its financing needs compared to that for 2023.

Discretionary policy

The final draft of Budget 2024 does not differ much from the initial one in terms of its overall policy direction. There is a big focus on income policy through wage hikes. The salaries of Greek civil servants will rise for the first time in 14 years, with the government planning to increase the salary of everyone in the sector by 6.5% to 10.5%. There is also a focus on social policy. Pension income will be raised on average by 3.05%. The maternity allowance for freelancers and farmers is also being increased in its duration by 5 months and raised by EUR 50 to EUR 200. The tax-free income limit is being raised by EUR 1,000 for pensioners in general and households based on the number of children.

In terms of tax policy, the government has made the reduced VAT on tourism, culture, transport, and gyms permanent, while the reducer VAT on coffee and taxis is maintained for H1 2024. Conversely, the VAT rate on soft drinks sold by restaurants is being raised to 24% from 13%. The ENFIA (property tax) is also being cut by 10% for those who have insured their property against natural disasters. The final draft of Budget 2024 has two differences compared to the initial one - higher expected GFCF growth and higher spending on health and education. The government is expecting its efforts to combat tax evasion to raise another EUR 600mn in 2024, which are being earmarked for more health and education spending.

The government has delayed the planned cut in social security contributions by 1 year to 2025. This was in large part forced by some unforeseen natural disaster relief and reconstruction projects, which emerged this year and will have a major fiscal impact in 2024 as well. The government has spent EUR 120mn on immediate relief already and total reconstruction costs are being estimated at EUR 3.3bn, which will in large part be financed by EU funds. The state budget state aid funds are also being doubled to EUR 600mn in 2024. These measures have limited the available fiscal space for other items.

Overall assessment and risks

We find Budget 2024 realistic overall, although the GDP projection seems questionably high. Nevertheless, even if the GDP projection misses the mark, we are not much worried about the fiscal targets outlined by the government, all of them seem achievable, even if the Greek economy underperforms somewhat next year. We also remind that the Greek state still maintains a substantial cash reserve close to EUR 35bn and the recent upgrade in the country's credit rating has helped restrain and lower borrowing costs, even in the context of an otherwise high-interest financial environment.

The most obvious risk to Budget 2024 is a lower-than-expected level of economic activity, more specifically capital formation. The government has set an ambitious target of 15.1% GFCF growth in 2024. This level will be difficult to achieve if external economic conditions in the Eurozone continue to deteriorate and the ECB keeps hiking interest rates. Public investment would then have to pick up the slack, putting a lot of pressure on the timely execution of PRR projects. The other key risk is a repeat of the significant damage that was dealt by natural disasters in 2023. Wildfires were especially violent this year and Thessaly, which is key for the country's agricultural sector, experienced very extreme levels of flooding. If something similar repeats in 2024, the budget will be strained, even with the extra funds that the government is allocating for emergency state aid.