MacroPolis

The latest release by ELSTAT of consumer prices in Greece, which saw the index rise by 5.1 pct year-on-year in December, confirmed the concerns the authorities have about the wave of price hikes persisting far beyond any initial expectations.

Greece was in deflation for about one year until May this year, when the CPI edged above zero for the first time and has accelerated ever since as firms had to tackle increased transportation costs, supply chain issues that pushed up the prices of raw materials and from September the price of energy came to compound production costs. December's rise was the highest since 2011.

The jump in energy prices started spinning out of control in October, when natural gas increased year-on-year by 132.3 pct, heating oil increased by almost 46 pct and electricity prices by 18.9 pct.

This set a trend that continued all the way to the latest release by ELSTAT where the increases in energy also ranged between 34.1 pct for heating oil, 45 pct for electricity and almost 136 pct for natural gas.

The main issue for the authorities is that price hikes have now spilled over across most goods and services in the Greek economy, with the index for goods up by 5.4 pct in December and 4.8 pct for services.

Prices related to housing are leading the rise with 18 pct in December, largely due to energy related expenses, followed by transport where the rise is 10.9 pct, mostly due to the price of oil.

Food and non-alcoholic beverages were up by 4.3 pct and clothing and footwear rising by 3 pct.

This has pushed the authorities to explore avenues to contain the impact on households, with the prospect of VAT reduction surfacing in the public debate this week.

Based on the 2022 final budget data, indirect taxes on goods and services are seen at 28.49 billion euros this year, from 26.22 billion in 2021 and 24.22 billion euros in 2020.

In comparison, personal and corporate incomes taxes are seen fetching 15.35 billion euros in 2022, from 14.04 billion euros in 2021 and 13.87 billion euros in 2020.

It is evident that the Finance Ministry expects indirect taxation to do much of the heavy lifting in closing the fiscal deficit this year as the economy continues its recovery.

Specifically, VAT alone is estimated at 18.76 billion euros, outperforming by some margin the revenues from income tax, rising from 17.11 billion euros last year and 15.36 billion in the first year of the pandemic in 2020.

It is no surprise that Finance Minister Christos Staikouras was quick to nip in the bud any talk about reducing VAT rates to cushion households from the inflation wave. Greece entered this week the latest post-programme review, which will also include discussions about Greece completing the enhanced framework in the second half of this year. Also, discussions about the new Stability and Growth Pact rules are intensifying in the eurozone.

It is noted that in most official documentation and exercises about the sustainability of Greek debt, it is assumed that Greece will deliver a primary surplus worth over 2 pct of GDP for the period up to 2060.

For 2022, after two years of running primary deficits of over 7 pct of GDP due to the pandemic impact and support spending, Greece has committed in the budget to rein in the primary deficit at 1.2 pct of GDP, with a total deficit of 4 pct.

With the SGP escape clause due to run out this year, these figures will need to turn into a surplus next year and as such the ministry is reluctant to offer any solutions that will jeopardise this fiscal path.

This is also tied to the ministry’s efforts to secure an investment grade by next year. Fiscal prudence is the required condition to bring the debt back in a downward path, something that has been flagged up by all rating agencies.