Draft Budget 2023: Credible target for a primary surplus with strong cyclical tailwinds helping to offset the energy related stress
The Draft Government Budget for 2023 aims at restoring a fiscal primary surplus in 2023, continuing on the improving trend experienced in 2022, despite the higher-than-expected fiscal support implemented in 2022 to cushion the impact of energy crisis and surging inflation
▪ Despite a less supportive economic environment, the General Government primary balance is expected to swing back to a primary surplus of 0.7% of GDP in 2023, from an estimated primary deficit of 1.7% of GDP in 2022, significantly improved compared with a deficit of 5.0% in 2021
▪ The strength of the economic recovery in 2022, in conjunction with improved fiscal efficiency, led to a much better-than-expected rebound in tax revenue in FY:2022; estimated at €4.6 bn above the respective Budget 2022 target (+13% y-o-y). A surge in VAT revenue accounts for 2/3rds of the increase, with PIT and CIT revenue also outperforming the original targets
▪ Primary expenditure is envisaged to drop by 4.0% of GDP on an annual basis in 2022, on the back of favourable cyclical effects. Primary expenditure reduction will be the main source of fiscal adjustment in 2023 (3.4% of estimated GDP) arising from the non-renewal (and frontloading in late-2022) of some energy support measures and the elimination of the remaining Covid-19 support schemes
▪ In 2023 the increase in tax revenue is conservatively assumed to be moderate (+2.9% y-o-y), due to slowing economic growth and lower inflation, as well as the introduction of new tax relief measures (abolition of the social solidarity surcharge on public servants and pensioners)
▪ Nevertheless, the fiscal support to the economy in 2023 will remain significant but will be more targeted than in 2022. The gross value of fiscal support is estimated at €13.4 bn in 2022 and at c. €10 bn in 2023, with around €7 bn of financing raised through the national Energy Transition Fund (ETF) in 2023 broadly similar to the level in 2022, thus reducing the impact on the Budget
▪ The key fiscal risks for 2023 include: i) worse-than-expected developments on the energy front; e.g. crude oil prices significantly above $96 per barrel (assumed in the Budget) and natural gas prices higher than €200/MWh, resulting to higher and more persistent inflation and additional need for support, and ii) a deeper recession in the euro area from the energy and geopolitical stress, which would take a heavier toll on Greece’s external demand conditions and tourism
▪ Public debt is projected to decline to a 13-year low of 161.6% of GDP in 2023 from 169.1% in 2022 and 193.3% in 2021, and, in conjunction with the prospective achievement of a primary surplus, is expected to support the effort to regain investment grade status
▪ The Draft Government Budget for 2023 aims at restoring a fiscal primary surplus in 2023, continuing on the improving trend experienced in 2022, despite the higher-than-expected fiscal support implemented in 2022 to cushion the impact of energy crisis and surging inflation
▪ Despite a less supportive economic environment, the General Government primary balance is expected to swing back to a primary surplus of 0.7% of GDP in 2023, from an estimated primary deficit of 1.7% of GDP in 2022, significantly improved compared with a deficit of 5.0% in 2021
▪ The strength of the economic recovery in 2022, in conjunction with improved fiscal efficiency, led to a much better-than-expected rebound in tax revenue in FY:2022; estimated at €4.6 bn above the respective Budget 2022 target (+13% y-o-y). A surge in VAT revenue accounts for 2/3rds of the increase, with PIT and CIT revenue also outperforming the original targets
▪ Primary expenditure is envisaged to drop by 4.0% of GDP on an annual basis in 2022, on the back of favourable cyclical effects. Primary expenditure reduction will be the main source of fiscal adjustment in 2023 (3.4% of estimated GDP) arising from the non-renewal (and frontloading in late-2022) of some energy support measures and the elimination of the remaining Covid-19 support schemes
▪ In 2023 the increase in tax revenue is conservatively assumed to be moderate (+2.9% y-o-y), due to slowing economic growth and lower inflation, as well as the introduction of new tax relief measures (abolition of the social solidarity surcharge on public servants and pensioners)
▪ Nevertheless, the fiscal support to the economy in 2023 will remain significant but will be more targeted than in 2022. The gross value of fiscal support is estimated at €13.4 bn in 2022 and at c. €10 bn in 2023, with around €7 bn of financing raised through the national Energy Transition Fund (ETF) in 2023 broadly similar to the level in 2022, thus reducing the impact on the Budget
▪ The key fiscal risks for 2023 include: i) worse-than-expected developments on the energy front; e.g. crude oil prices significantly above $96 per barrel (assumed in the Budget) and natural gas prices higher than €200/MWh, resulting to higher and more persistent inflation and additional need for support, and ii) a deeper recession in the euro area from the energy and geopolitical stress, which would take a heavier toll on Greece’s external demand conditions and tourism
▪ Public debt is projected to decline to a 13-year low of 161.6% of GDP in 2023 from 169.1% in 2022 and 193.3% in 2021, and, in conjunction with the prospective achievement of a primary surplus, is expected to support the effort to regain investment grade status.
Credible target for a primary surplus in 2023 with strong cyclical tailwinds helping to offset the energy-related stress The Draft Government Budget for 2023 aims at returning to fiscal primary surplus, following a substantial decrease in the General Government primary deficit in 2022, after two years of Covid-19 pandemic-related fiscal disequilibrium. This rebalancing is planned to be achieved despite the maintenance of substantial fiscal support to businesses and households in order to cushion the impact of the energy crisis. The General Government primary balance in 2023 is projected
to swing back to a primary surplus of 0.7% of GDP (€1.6 bn, ESA 2010 definition). In FY:2022 the primary deficit is expected to shrink by 60% y-o-y, to 1.7% of GDP (€3.6 bn), broadly in line with the respective Stability Programme 2022 estimate of 2.0% of GDP. In 2021, the respective outcome was a primary deficit of 5.0% of GDP (€9.1 bn). The improvement is already reflected in the position of the primary State Budget in 8M:2022; balanced in comparison with a 3.5% of GDP deficit in 8M:2021. The encouraging fiscal performance in 2022 is driven by the
following factors:
• The strength of the economic recovery has led to a strongerthan- expected rebound in tax revenue, which has been bolstered by increased tax efficiency following several years of fiscal reforms. Tax revenue is anticipated to increase by 13.2% y-o-y in FY:2022, at a broadly similar pace as nominal GDP (estimated at +14.8% in FY:2022), exceeding by €4.6 bn (+9.1%) the respective Budget 2022 target. More specifically: o VAT revenue is expected to have a significant contribution to the overperformance – up by an estimated 23.3% y-o-y or +€4.0 bn in FY:2022 (+25% y-o-y in 8M:2022) – accounting for around 2/3rds of the increase in total tax revenue by €6.4 bn in FY:2022 vs FY:2021. o PIT and CIT revenue are projected to increase by 7.7% y-o-y and 15.3% y-o-y, respectively, in FY:2022 – jointly adding €1.3 bn in y-o-y revenue growth – on the back of favorable labor market conditions and strong corporate profitability (labor compensation increased by 7.8% y-o-y in H1:2022 and gross operating surplus and mixed income by 13.9% y-o-y, with Q3 trends remaining robust). This strong revenue performance has been achieved despite reductions in tax rates enacted in 2022 (e.g. real estate taxes).
• General Government revenue is expected to post an even stronger increase in FY:2022 (+14.4% y-o-y), as transfers to the State Budget exceeded the initial target by €1.5 bn, mainly due to increased refunds of ANFA/SMP revenue and higher-thanbudgeted EU financing of the PIB. • Primary expenditure is envisaged to drop by 4.0% of GDP in 2022 compared to 2021, accounting for the entire decline in primary deficit as percent of GDP. Indeed, the level of primary spending in FY:2022 is projected to be €6.5 bn above the Budget 2022 target, due to unforeseen fiscal outlays and the need to maintain increased contingency reserves related to the energy crisis. However, the significantly higher-than-expected nominal GDP growth in 2022 (+14.8% y-o-y compared with 6.9%, estimated in the 2022 Budget), offsets the impact of new fiscal support measures on the expenditure-to-GDP ratio. • In 2022, the combined primary surplus in the balances of other General Government entities (social security funds, local government and extra budgetary funds) is projected tο decrease by 0.6 pps to 0.9% of GDP, remaining broadly in line with the Budget 2022 target, despite the upward pressure on spending components due to increasing costs. Notably, the surplus in social security funds was by 85% higher than the Budget 2022 target, with revenue from social security contributions expected to rise by 4.4% y-o-y in FY:2022 despite a further 0.5-pp reduction in the social security contribution rates in 2022. The substantial increase in the minimum wage in
2022 (+9.7% since July 2022) should further bolster social security system revenue in 2023. Returning to a primary surplus in 2023 despite persistent energy headwinds. The Draft Budget aims at a General Government primary surplus of €1.6 bn (0.7% of GDP) in 2023, from an estimated €3.6 bn deficit in 2022. This adjustment needs to occur in a less favorable economic environment than in 2022, with nominal GDP growth at 5.3% y-o-y (+2.1% in constant price terms) and will be driven by a reduction in primary expenditure by €4.1 bn (-6.1% y-o-y or 3.4% of estimated GDP). The bulk of these savings will come from the non-renewal, and frontloading in late 2022, of some energy support measures, the elimination of the remaining Covid-19 support schemes, the clawback of extraordinary profits.
Targeted relief, with a net fiscal cost of €3.3 bn, is planned for 2023, which corresponds to a gross value of measures of €10.3 bn, compared with €13.4 bn in 2022, when accounting for financing through the national ETF of energy producers along the lines of the framework applied in H2:2022, and a more efficient adjustment of government subsidies to electricity costs (see next section).
The increase in tax revenue in 2023 is expected to be more moderate (+2.9% y-o-y), due to slowing nominal GDP and the introduction of new tax relief measures. Specifically, the abolition of the social solidarity surcharge on public servants and pensioners will negatively impact PIT revenue (entailing a fiscal cost of €1.2 bn). This surcharge has already been suspended for private sector employees since 2020 and will henceforth be abolished from 2023 and onwards. Nonetheless, the positive carryover effect from the strong revenue overperformance in 2022 will be substantial, with tax revenue exceeding in 2023 their 2019 level by 9.8%. VAT revenue growth is conservatively projected at +2.6% y-o-y, reflecting the risk of a drop in the volume of demand in income elastic categories (where the high VAT rate applies), and a decreasing business sales growth, compared with the rapid pace in 2022. As regards the total General Government deficit, it is expected to decrease to 2.0% of GDP in 2023 from 4.1% in 2022 and 7.4 in 2021, compared to the Stability Programme estimates of 1.4% in 2023 and 4.4% in 2022, mainly reflecting the above described
adjustment in primary balance. Key measures of fiscal support to soften the blow from higher energy prices. The gross value of fiscal support to the economy in 2022 is estimated at €13.4 bn (6.4% of GDP), of which €12.1 bn correspond to measures against the energy crisis. In 2023, the gross value of support is estimated by the NBG Economic
Analysis Division to decline to a still respectable €10.3 bn. However, a significant part of the above-mentioned cost for 2022 is financed – according to Draft Budget estimates – by €9.5 bn from the national Energy Transition Fund, of which €7.5 bn correspond to current revenue coming from emissions trade and interventions in wholesale electricity market. Similarly, for 2023,
the NBG Economic Analysis Division estimates that another €7.0 bn of funding could be secured through the ETF. Accordingly, the net cost of the total fiscal support in 2022 is estimated at €6.0 bn. In 2023, the total value of net fiscal support is estimated at €3.3, of which c. €1.0 bn reflects a contingency reserve for energy-related fiscal needs.
The key risks to the fiscal scenario of the Draft Budget for 2023 include: i) worse-than-expected developments in the energy front, e.g. crude oil prices significantly above the budget estimates of $95.6 per barrel and natural gas prices (Dutch TTF) of €200/MWh, resulting into higher inflation, as well as depressed consumption and production levels domestically, and ii) a deeper recession in the euro area which would take a heavier toll on Greece’s external demand conditions and tourism. These tensions would entail additional needs for fiscal support.
General Government debt as percent of GDP is projected to decline to a 13-year low of 161.6% in 2023, following a steep drop to 169.1% in 2022 from 206.3% in 2020; significantly lower than the Stability Programme estimates of 168.6% and 180.2% of GDP for 2023 and 2022, respectively. This performance, in conjunction with the achievement of the ambitious fiscal target for 2023, are expected to support the effort to regain investment grade status, while bolstering credibility in a period of increasing sovereign yields, due to the accelerating normalization of monetary policy.