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The Greek Budget Myth

Feldstein, M., (2013), “The Greek Budget Myth”, Project Syndicate, 27 November.

Recently, newspaper headlines declared that Greece would have a balanced budget for 2013 as a whole. The news came as quite a shock: Recall that when Greek officials came clean about the true state of their country’s public finances in 2010, the budget deficit was more than 10% of GDP – a moment of statistical honesty that triggered the eurozone debt crisis. It seemed too good to be true that the Greek deficit would be completely eliminated in just three years.

In fact, it is too good to be true. Any reader who went beyond the headlines soon discovered that the prediction of a zero budget deficit was in fact misleading. The International Monetary Fund was predicting only that Greece would have a zero “primary” budget deficit in 2013.

A “primary” budget deficit (or surplus) is the difference between a government’s outlays for everything excluding the interest payments that it must pay on its debt and its receipts from taxes and other charges. In the case of Greece, the interest payments apply to government debt held by Greek individuals and institutions, as well as to government debt held by the IMF, the European Central Bank, and other foreign lenders.

The overall budget deficit is still predicted to be 4.1% of Greece’s GDP in 2013 – a substantial improvement compared to 2010 but still far from fiscal balance. The difference between the overall deficit and the primary deficit implies that the interest on the Greek national debt this year will be 4.1% of GDP.

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