Speech on the State Budget for the Fiscal Year 2012

Mr Speaker, Honourable Members of Parliament,

I. A historic budget

The Budget for the fiscal year 2012 has been prepared, and shall be executed, at a critical juncture for Greece – critical because our actions today will decide the country’s economic future, not only for 2012 but the entire decade.

Indeed, this is a moment of immense national significance for our country. Both Greece and Europe are faced with the worst economic crisis in decades. Few generations in recent times have been called upon to deal with challenges of such critical importance for our nation. Circumstances demand that we transcend our limitations and surpass ourselves. We have to prove that we are one of those generations in Greek history that was able to succeed against overwhelming odds.

The 2012 Budget is a tough budget. It has to be executed within an economic environment that labours under a host of uncertainties. The Budget targets are ambitious. Greater still are the challenges in implementing the measures needed in many economic sectors. But we have to meet these targets, and we have to implement these measures. This is why we have to show determination and persistence in our endeavour. We have to work to the best of our ability and leverage our every strong point, in a spirit of cooperation. We cannot afford the luxury of bewailing our fate, nor can we continue the practice of exchanging mutual recriminations about the past – about who is, and who is not, to blame for our current plight. History will judge us harshly if, while waving our swords at the past, we abandon the struggle for the future.

The endeavour to implement fiscal consolidation and the restructuring of the economy, which will lay the foundation for sustainable and balanced growth, is nothing short of a national struggle whose success depends on the contribution of each and every one of us. This struggle transcends narrow party-political forces and dividing lines. The broad union of political forces achieved with the formation of this government of national unity needs to be backed by a truly concerted effort, on the part of us all, so as to ensure success.

By successfully executing the Budget Greece will meet its obligations to its lenders, restore the country’s international credibility, and create the basic conditions needed to overcome the crisis and rescue the economy. This will require steadfast efforts at a time of heightened uncertainty, and in a Europe – shaken by the crisis – that is seeking the next major step forward.

The Budget serves as the guide for the fiscal policy we must follow. It maps out targets and directions; it does not contain easy solutions that we agree today and forget tomorrow. The execution of the budget requires the motivation not only of the new unity government, but of all the social and political forces that support it. It requires us to maximize our shared interests and not allow our differences to divide us – these are of minor importance in the face of the challenge that lies ahead: to rescue this country. The citizens of this land will appreciate the genuine effort and contribution of all political forces. They will surely reward cooperation and responsible management.

The economic crisis that has gripped our country is no mere storm that will soon blow over. It will take time to pass because it is the product of imbalances that were exacerbated over many years through the accumulation of errors and omissions in policies that led to the creation of excessive debt. It is the result of a prolonged process of deferral of solutions, which, though serving short-term political ends, came at a terrible long-term cost for the economy and society.

Accordingly, the resolution of these problems will now take time and incur sacrifice. After four years of recession, this has become painfully obvious to everyone. Nevertheless, the positive impact of fiscal consolidation and structural adjustment will gradually become apparent: in economic growth, improvements in the real incomes of working people, and employment.

II. The key features and challenges of the 2012 Budget

The 2012 Budget serves the national goal of stabilizing and then rebooting the economy within an extremely sensitive and volatile European and global economic environment. The Budget is more than an exercise in regulating cash-flows and public finances. It serves the key objective and broader endeavour to restore the conditions for stability and growth in our economy. It encodes the necessity for both these things. We cannot have growth without stability. And we cannot secure stability if growth is not forthcoming. The Budget requires a long-term effort on the part of the current and future governments. This is reflected by the fact that, this year for the first time, the Budget targets for 2012 are consistent with the objectives of the Medium-Term Fiscal Strategy Plan for 2012-2015.

The 2012 Budget sets out a series of targets that are ambitious but achievable. The macroeconomic assumptions underlying it are modest and consistent with the projections of all the international organizations. The adjustment in the general government deficit derives, symmetrically, from revenues and expenditure. To illustrate, in 2012 revenues are forecast to increase by €4.5 billion while total spending will decrease by c.€5 billion.

The first key feature of the 2012 Budget is that, for the first time in recent years, the budget provides for a primary surplus, which is essential if we want to reverse the tide of rising debt. Although recession will persist in 2012, the Budget forecasts a primary surplus in the region of €2.2 billion, equivalent to [1.1%] of GDP. In other words, estimated government revenue will exceed primary expenditure (i.e. expenditure that does not include interest payments). The return to a primary budget surplus is an onerous, but not impossible, task. Achieving this goal, from 2011 to 2012, will require a €6.8 billion improvement in the general government primary balance, while over the course of the previous two years (2009 to 2011) the cumulative fiscal adjustment has been c. €20 billion. In the years to come, the primary surplus will need to increase further, so that the debt-to-GDP ratio can decrease to around 120% by 2020.

The projected increase in government revenues derives from both the increase in tax rates and changes in income tax. The shortcomings of the taxation system in Greece are a long-standing problem. Although the tax rates in Greece are no lower than in other European countries, our tax revenues as a percentage of GDP are well below the EU average. In 2010, tax revenues in Greece were c. 20% of GDP, compared with the OECD average of 25%. Indeed, according to EU data, the dramatic deterioration in tax revenues in Greece began long before the crisis. Cyclically adjusted revenues decreased from 35% of GDP in 2000 to 29% in 2009.

This situation reflects the major structural weaknesses of our taxation system: in the sphere of tax legislation, tax administration, the procedures for resolving tax disputes, and for punishing tax evaders. It has become clear that we need a multi-pronged approach in order to combat fraud effectively. Now is the time to put in place a comprehensive policy to deal with the phenomenon, which must then be applied to the letter in subsequent years. It is essential that we radically simplify taxation legislation by eliminating the manifold exceptions, exemptions, subsidies, and so on. Many of these arrangements were initially made in the name of social justice. And yet, the Greek taxation system presents a forest of injustices and gives rise to frustration on a daily basis.

Besides simplifying legislation, we must carry out a thorough restructuring of the tax collection apparatus, organize antiquated local tax offices and customs services on a new footing, and change tax inspection and auditing mechanisms. With the help of the Troika – particularly the IMF – new legislation has been drafted by the Ministry of Finance, which will be tabled before Parliament for approval. This is an important step forward in the effort to reduce tax evasion.

But the momentum must be maintained in the years ahead. The effort began with a series of measures that included the appointment of a public prosecutor for financial crime and a tax arbitrator, the launch of a dedicated tax revenue agency for large corporations, as well as various other measures. A good start has been made. Now we need to continue and follow up consistently on this groundwork, without backtracking.

Tax evasion is not only an economic problem. It is a profoundly social problem, and in Greece it has undermined public confidence in the wider public sector.

The fight against tax evasion will not only generate more – and dearly needed – income for the country. It will deepen the sense of fairness in the taxation system and restore public confidence in the state apparatus.

The other key challenge for the Budget as it unfolds is to ensure that strict controls are applied to spending. We all know of the wastefulness and mismanagement in the broader public sector. People also recognize that there is a need to strengthen spending on social cohesion, on enhancing education and health. Under current circumstances, the Budget cannot increase spending in these sectors. However, with the closure of various redundant agencies and organizations, the merger of others, and the rational management of available resources, it may be possible to increase the number and quality of services provided by the welfare system.

To streamline public administration we need to radically change the apparatus for monitoring and controlling public spending. The Finance Ministry has already put in place procedures for systematic controls. These must be intensified, run on an even more effective basis, and extended to cover all spending by both central government and local government and other public bodies.

I believe that when people are given tangible examples of effective government spending, and good public and social services, they will change their negative predisposition towards paying taxes. I understand the concerns of the average citizen, who has been asked to pay more taxes at a time when he sees his income declining, unemployment rising and the immediate economic outlook showing no improvement. But there are no easy solutions. We all have to play our part in helping the economy to avert the risk of becoming trapped in dead-end, and return to growth and prosperity.

A key component of 2012 Budget is the reduction in the debt-to-GDP ratio from 162% at the end of 2011 to 146% at the end of 2012, i.e. a debt reduction of c. €42 billion. This is the first reduction after a string of years where the constantly swelling public debt has succeeded in destabilizing the Greek economy. While the projected contraction in public debt in 2012 and the years thereafter will be due in part to the creation of primary surpluses, it largely reflects the PSI: the planned voluntary exchange of sovereign bonds by Greece’s private creditors.

This private sector involvement will serve to improve the sustainability of public debt.

A further key component of the 2012 Budget is that, for the first time, it includes detailed data on the general government, i.e. not only central government but also local authorities, hospitals, utilities and other public bodies. Accordingly, the public will know what money is flowing in and out of the various institutions and agencies of the general government, and precisely what these many public organizations spend. This is a first significant step towards achieving transparency in state income and expenditure, and will also enhance more efficient implementation of government policy. Our aspiration is to expand this effort by providing monthly reporting on the progress of the general government.

We want the taxpayer to know exactly how the taxes he or she pays are spent, and whether they are spent well.

The promotion of structural reforms and the implementation of the privatization programme are also important features of the Budget. In 2012, reforms in the health sector, the social insurance system (following assessment of supplementary pensions), the new taxation map of the country, the so-called closed professions, and the judiciary will be completed. Privatization will be pushed forward at a faster pace, not only so as to enhance state revenues but also to improve the efficiency of the organizations privatized, thereby giving a boost to economic activity.

The economic crisis has taken its toll on the public, with the sharp rise in unemployment and the decline in incomes. These problems cannot and should not be ignored. Yet the process of consolidation is absolutely necessary. The accumulation of excessive budget deficits over a succession of years led to the over-indebtedness of the government, resulting in the refusal of lenders to finance Greece at reasonable rates. At the end of 2011, Greek public debt corresponds to over €30,000 per capita. It is vitally important that the adverse growth trend of the debt be reversed. By restoring fiscal stability and credibility we shall return to an environment that is conducive to growth and employment.

An apt question is whether, in an environment of heightened uncertainty and weak economic activity, the Greek economy will be able to emerge from the anticipated recession in 2012. Although the uncertainties are great, there are a number of positive signs supporting the view that economic recovery will get off the ground in 2013.

First, exports have increased significantly and companies that are export-oriented have not been affected to such a degree by the economic downturn in
Greece.

Second, the decline in salaries and pensions is not expected to continue in 2013, nor the increase in tax rates, and accordingly disposable income and consumer spending will tend to stabilize.

Third, when various major projects, which have come to a standstill, are restarted and the absorption of National Strategic Reference Framework (NSRF) sources gains faster momentum, we shall see an increase in employment and an improvement in the investment climate. This will be boosted by the financing of major projects by the European Investment Bank and the technical assistance offered by our partners (a special Task Force has been set up) in reorganizing the public sector. In addition, the emergence of a more favourable business and investment environment, backed by a reduction in bureaucratic barriers, will stimulate entrepreneurship and private investment.

|II. We have a responsibility to lay the foundations for sustainable growth

The current fiscal clean-up is taking place in an environment that is far worse than anything we experienced in the previous two decades. The 1990s and 2000s were a period of global economic stability and growth, which would have eased the process of economic adjustment. Today’s financial crisis and concomitant uncertainty, as well as the generalized endeavour to push through fiscal consolidation elsewhere in Europe, have hit the incomes of our trading partners, thereby frustrating our efforts to return to growth by boosting exports. In such a climate, Greece is compelled to redouble its efforts to attain the magnitude of fiscal adjustment achieved in the 1990s.

Against this harsh background, we have to draw on our reserves of efficiency, determination and ingenuity. This is the only way we can offer a viable future to the next generation, which, though better skilled and qualified than ever, is now seeking a brighter future abroad.

Do we have the ability and the stamina for such a national effort? I believe we do, so long as the country’s political forces work together and society remains united. Given the scale of our problems, we shall need to continue our endeavours well beyond 2012. It will require hard work and perseverance by more governments. But, if we want, we could make this a decade that ultimately delivers positive results. How?

- if, by concerted actions and measures, we build a new economic and institutional framework that will place Greece in the community of advanced countries;

- if we evolve a new sustainable model of economic growth, investment and employment founded on an outward-looking orientation, producing competitive services and products;

- if, swiftly and methodically, we push through all the changes needed to unlock the untapped dynamism of the Greeks, the virtues and talents of the creative forces of this country.

The drive to implement economic reform is sometimes presented, in some quarters, as being dictated by our European partners and international organizations. This view, however, hardly does us justice. Fiscal consolidation and the reconstruction of our economy – with the support of our partners – are developments that are first and foremost to our benefit. We should therefore assume full responsibility for how we set our priorities, how we develop initiatives, and how effectively we implement the policies needed to revive the economic outlook of this country. It is important to realize that, in the last analysis, we are not under the surveillance of the Troika; rather, we are under the surveillance of History.

IV. We have a responsibility to remain within Europe

Greece is and will remain a member of the united Europe and the euro area. The Greeks will not drop this membership casually – after all, it is the nation’s most important post-war achievement. It provides us with conditions of greater security in matters of defence and the economy.

Let me stress: our place in Europe is not up for negotiation. The Greek people will defend it at any cost.

But we should remember that membership of the euro implies rules and obligations that we must steadfastly observe if we wish to enjoy the benefits of a global currency, and if we wish to depend on European solidarity. The crisis has revealed flaws in the structure and function of Economic and Monetary Union, flaws that contributed to the formidable sovereign debt crisis that is currently stalking the euro area. If they stick together, united in their resolve, the European nations will overcome this crisis.

But a requirement for our participation in the common European project is that we meet our national commitments, that we implement fiscal consolidation, and improve the competitiveness of our economy. In spite of the crisis, Europe and our common currency remain one of the greatest achievements of modern history. The ancient source of European political history, Greece is an integral participant in the joint project of ever closer European integration. Greece belongs in Europe, and Europe is unthinkable without Greece.

V. To sum up: We can do it

The crisis is taking its toll on Greek society. It is hitting jobs, denting real incomes, undermining aspirations. The exit from the crisis will not be easy; there are no short cuts. Anyone who suggests otherwise is not speaking from a position of responsibility. Economic recovery demands effort and sacrifices, national unity and mobilization of all the creative forces in the country.
Yet, the crisis presents us with a historic opportunity: the chance to turn a new leaf:

- To rebuild the state and our economy, placing them this time on solid fiscal foundations.

- To reinstate the rule of law, with institutions and rules that are respected and observed by all.

- To rid ourselves of the oligopolistic market structure, lack of transparency in dealings, and easy money that generates complacency, feeds corruption, and exacerbates inequalities.

- To turn our back on a culture of generalized tax evasion, and recover a sense of duty to one’s country, a desire to eliminate social injustice.

This crisis has taught us the hard way that errors and omissions come at a price, that prosperity does not consist in a house of cards and borrowed money.

Rather, it requires organization and continuity; it requires that we play by the rules; it requires hard, disciplined and productive work. Above all, we have learned that the first to suffer the impact of the crisis are the weakest. And this is why we must ensure that this never happens again, by reforming the state, by eliminating the deficits, by shifting to a competitive and outward-looking model of economic growth.

The government of national unity embodies the unity and determination of the Greek people in the face of the worst crisis in decades. It embodies the threefold historic responsibility of our generation:

- To pull Greece out of the spiral of recession;
- To consolidate the country’s place in Europe and the euro;
- To create the conditions needed to foster economic recovery and sustainable growth.

The 2012 Budget is yet another concerted step in this direction. It sets ambitious targets and implies considerable sacrifice. But remember, the sacrifices will be vindicated by the outcome.

I urge you to support these efforts and play your part in shaping the future of our land by voting for the 2012 Budget. Through national unity, hard work, and faith in the country’s potential, Greece will enjoy the brighter future she deserves. We can – and will – succeed.