Greece: Government unveils final 2011 budget
November 23, 2010
On 15 November, Eurostat revised the 2009 Greek budget deficit up from its previous 13.6% of GDP estimate to 15.4% of GDP. In response to this revision, the government unveiled the final 2011 budget draft, in which it confirmed its commitment to achieve the targets set by the International Monetary Fund and European Commission. The supervised economic program aims to reduce spending and increase revenues in order to narrow the fiscal deficit to less than 3% of GDP in 2014. In the 2011 budget approved by the parliament on 22 November, the Greek government projects a shortfall of 9.4% of GDP for 2010, higher than the initial 8.1% originally targeted in the EU/IMF supervised Economic Policy Programme. In 2011, the government aims to further reduce the fiscal deficit to 7.4% of GDP, a slight improvement from the 7.6% deficit target previously negotiated. To compensate for the slippage in this year's deficit, the government has announced a new set of austerity measures for 2011 worth 2.7% of GDP, which is in addition to measures worth 3.9% of GDP already in place. Expenditure measures will focus on cutting health-related spending, reducing costs in loss-making state-owned enterprises and a freeze on nominal pensions. From the revenue side, the budget contemplates an increase in the intermediate VAT rate from 11% to 13%, as well as additional measures aimed at cracking down on tax evasion. The market response has been virtually indifferent to the latest developments and investors' risk aversion towards Greek assets remains high. Greece's 10-year benchmark bond is currently yielding 11.47%, 392 bps higher than six months ago; Greek bonds yield 854 bps more than the equivalent US Treasuries and 876 bps more than those of Germany.