Greece’s Primary Surplus Was Smaller Than Reported

One of the main issues surrounding Europe’s relationship with Greece is its budget balance. In an ideal scenario, the rest of Europe would like Greece to run a budget surplus and start repaying its debts. At the least, the EU wants Greece to balance its budget and stop getting deeper in debt.

For whatever reason, the language that the EU has chosen to communicate this desire is to specify targets for Greece’s primary budget surplus. Now, there’s not really any good reason to speak in such terms, since what the EU really wants Greece to achieve is a positive overall surplus. But anyway, primary surplus is the lingo the EU has chosen, and that’s the lingo all the journalists and columnists following the story are using, so one has to follow along.

The primary budget surplus is the budget surplus before interest payments. So to achieve a balanced budget, the primary surplus has to equal interest payments. As I've previously calculated, interest payments were around 1.7% of GDP in 2014 and should be around 1.9% of GDP this year, net of previously agreed refunds of interest paid to European central banks and deferred interest on European Financial Stability Facility debt, which gets added to the principal.

So Greece would need to run a primary surplus of at least 1.9% of GDP to balance its budget. Or, to keep its stock of debt from growing, the surplus would have to be a bit more than that, to pay down a bit of debt equal in size to the accumulating deferred interest.

The European adjustment program for Greece targeted a primary surplus of 1.5% of GDP in 2014, 3% of GDP in 2015 and 4.5% of GDP in 2016 on. So the adjustment program was pushing for about a 1% budget surplus this year and about a 2.5% budget surplus in 2016 on.

That might seem clear enough, but the trouble is, not everybody counts the primary surplus the same way. Especially not in Greece, where the religion is Orthodox and the budget data are anything but. So if you’re trying to follow how Greece is doing on those primary budget surplus targets, you need to be aware that there are going to be multiple versions of the story.

Some variations are common across countries. A primary budget balance might refer only to the central government, or it might refer to the consolidated public sector, which in Europe is usually called “general government.” A primary budget balance usually excludes privatization revenues, but might include them – there’s not really any agreement on how to handle those. The targets Europe set for Greece refer to the general government primary surplus, not including privatization proceeds.

You might have read, including in my own previous article, that Greece ran a primary budget surplus of €1.87b or just over 1% of GDP in 2014. The number comes from the Greek government’s State Budget Execution Monthly Bulletin.

But that’s a central government primary surplus, and includes privatization receipts.
And it also includes something highly unorthodox: refunds of interest payments. Since the primary balance excludes interest payments from the expense line, it’s obviously weird and misleading not to also exclude refunds of them from the income line.

This table shows how to reconcile Greece’s published primary balance numbers as best as possible with the standard method:

The Greek count of the primary balance takes state budget revenue, subtracts state budget expenditure and adds back interest payments. The standard method used in the adjustment program takes consolidated government revenues, subtracts interest refunds, privatization receipts and consolidated government expenditure, and adds back interest payments.

By the standard method the primary surplus was €1.17b or 0.7% of GDP, or about €700m less than Greece’s reported primary surplus. The figures for consolidated revenues and expenditures come from a separate government budget bulletin.

Note that any count the EU might eventually publish would surely differ. The EU would use Eurostat data on general government revenues and expenditure, which differ from Greece’s and haven’t been published yet for 2014. And the EU would also make other technical adjustments (see page 22 for the lowdown). The EU doesn’t usually publish primary surplus figures except for countries in adjustment programs. The IMF will eventually publish a 2014 primary surplus figure for Greece, but its method differs from the EU’s and Greece’s.

It’s worth pointing out that as of the end of November the previous Greek government was running a consolidated primary surplus of 1.5% of GDP, by the standard method. But to be fair, the main reason the budget balance deteriorated so sharply in December was simply that the government caught up on budgeted spending. The details are in the table below, which uses the same two series of monthly bulletins going back to September.

Central government expenditure was €1.83b behind budget at the end of November and only €0.98b behind budget by the end of December.

It’s also true that there was a serious deterioration of tax collection in December: tax revenues fell short of target by €706m in December, bigger than the shortfall for the whole of January-November. Rumors have it that January was even worse.

You might notice another, bigger shortfall of interest refunds. That’s because European central banks hadn’t yet refunded the roughly €1.9b of interest that Greece paid them during the year. I’m not sure they ever actually planned to pay the refunds before year-end. But in any case, those refunds are now being withheld because Greece has quit the adjustment program.

(UPDATE: Overall revenues were €935m or 20% short of target in January, according to the January state budget bulletin. That compares to revenues that were €907m or 14% short of target in December, excluding the €1.9b of withheld interest refunds. The January bulletin didn’t provide separate figures for tax revenue.)

(UPDATE2: I clarified the IDs of the budget lines in the second table. “State Budget” is the core central government, not including some off-budget central government bodies. “General government” is the consolidated central and local government sector, but these are advance numbers published by the Greek finance ministry, which differ from those published later by Eurostat.)

(JULY 2 UPDATE: The IMF has confirmed: zero primary surplus in 2014 by their method. I’ll be posting an update soon.)