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Greece and primary surpluses

Wren-Lewis, S. (2015) “Greece and primary surpluses“, Mainly Macro Blog, 24 Φεβρουαρίου.


In my simple guide to the current macroeconomic position of Greece, I said that a major mistake made by the Troika was to insist on a pace of fiscal adjustment that was far too fast. It led to a collapse in the economy. Of course a collapse in the economy itself raises the deficit. So people who just look at the deficit, including many comments on that post, say ‘what adjustment’ and ‘just how many years does Greece need’.

It is easy to avoid this trap. The OECD publishes a series for the underlying primary balance, which is their guess at what the primary balance (taxes less spending excl. interest payments) would be if the output gap was zero. It is the first row in the table below: the estimated output gap is below. I’ve also shown the scale of the decline in GDP, just to show that the output gap numbers are pretty conservative. Unemployment in Greece is over 25%, and over half of all young people are unemployed.

2009 2010 2011 2012 2013 2014
Underlying primary balance(% of GDP) -12.1 -6.0 -0.7 2.9 6.7 7.6
Output gap (%) 4.3 0.2 -7.1 -11.6 -14.2 -12.7
GDP growth (%) -4.4 -5.3 -8.9 -6.6 -4.0 0.8

2009 was the peak underlying primary deficit, and it was huge, representing the actions of a truly profligate government. However what followed was complete cold turkey: within two years the underlying primary balance was close to zero. A pretty conservative estimate for the impact of fiscal consolidation would reduce GDP by 1% for each 1% of GDP reduction in the primary balance. In those terms, all of the current output gap in Greece can be explained by austerity.


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