Greek Primary Current Balance

In this post I will do a simple enough exercise: Look into the evolution of the Greek government primary current balance. This is just the balance of current income minus current expenditure excluding interest. Thus it excludes both the investment budget as well as interest payments on government debt.

Although public investment does impact national income (and is added in GDP in the first place), the current primary balance can act as a crude estimate of the «weight» of government on the economic process. Especially its change from one year to the other indicates the expansionary or contractionary stance of fiscal policy.

The general pattern is quite clear. The primary current balance was in surplus in the late 1990s and reached a peak of 7.5% GDP during 2000. Afterwards, the fiscal stance relaxed substantially with a drop of 6.5% GDP in the 2001 – 2007 period to reach only 1% in the final year. The Great Recession took its toll with the balance dropping almost 6% of GDP during 2008-9 to a negative close to 5% GDP.

Then came austerity: The balance grew 8.6% of GDP in the 2010-13 period while it relaxed substantially during 2014 with a drop of 1.1% compared to an increase of 3% in 2013. This can most clearly explain the return to growth in 2014 since the economy experienced a change in the fiscal impulse of 4% GDP.

The effects of the 3rd economic adjustment program are also quite visible with the balance increasing 4.2% in the 2015-18 period which explains why these years had a sense of strong austerity despite a return to economic growth.

The 2019 current primary balance is expected to reach 7% of GDP, roughly similar to the 1999 balance. Yet 1999 registered 6% GDP private credit flow with a further increase to 10% during 2000 (which increased and persisted until 2008) while 2017 closed with a 1% fall in that flow. It is thus clear that the underlying dynamics are quite different and such a large surplus will definitely act as a serious drag on growth.

It is also interesting to take a closer look on the evolution of current revenue and primary expenditure during this time:

Current revenue starts with a steady increase during 1996 – 2000 (close to 5% GDP total increase), remains stable for a couple of years and then makes a step drop of 1.5% GDP in 2003 to 37.5% around which it hovers until 2009. Since then it starts an uphill march to around 45% in 2013, a change of 7.5% GDP. Although it grew more than 3% GDP in 2014 to 48.4%, this level appears quite unstable since current revenue is projected to return to 45.5% during 2019. Assuming that 45% is the «new equilibrium», future current primary balance will depend heavily on the primary current expenditure trajectory.

The latter appears to grow steadily from 30% in 1998 to 39% a decade later. Even the large austerity package from 2010 onward was not able to break that limit, mostly because of the large fall in GDP which made the denominator fall substantially along with nominal expenditures. The 2013-17 average was 41.7% which dropped significantly during 2018 to 40% GDP and is projected to reach 38.5% in 2019, a cumulative fall of 3% GDP in two years. Whether such a fall can be sustained in the long-run is a question that will be difficult to answer.

If primary current expenditure returns to the 41.5% average, the primary current balance will drop to half its 2019 projection to 3.5% GDP. Since that is the current primary balance target until 2022 this implies that the investment budget will need to be balanced. Given that is close to impossible, the stability of the 3.5% primary surplus target will depend on the Greek government achieving a primary current expenditure level of close to 38.5% GDP.

Actually (Gross Fixed Capital Formation – Capital Transfers Received) has a mean value of -2.4% GDP and a standard deviation of 1.42% for the period 1995 – 2017. If the values were drawn from a normal distribution the probability of a non-negative balance would be around 4%.