PBO: Leeway from beating tax evasion should be used for tax cuts, growth boosting

Any fiscal space created through the fight against tax evasion and the European agreement on defense spending should be directed toward policies that enhance the productive capacity of the Greek economy, such as reducing the tax burden on wage labor, according to a regular report from the Parliamentary Budget Office (PBO) published on Thursday.

However, the PBO’s quarterly report prioritizes the continued rapid reduction of public debt, which, as the report argues, “strengthens the perceived credibility of economic policy.” This has been a key factor behind recent upgrades from rating agencies, which have acknowledged the positive trajectory of public debt.

Professor Giannis Tsoukalas, head of PBO, stated on Thursday that no fiscal leeway would emerge from the defense spending agreement, but rather from addressing tax evasion. He also opposed proposals to reinstate civil servants’ holiday and leave bonuses, warning that “such interventions would be a mistake because they would bring us back to the process that led to the crisis,” referring to the period leading up to the bailout process of the 2010s.

Tsoukalas further mentioned that the primary surplus in 2024 may exceed the 3.5% of GDP recently projected by Deputy Prime Minister Kostis Hatzidakis, in contrast to the 2.5% forecast in the 2025 budget report.

“The Greek economy has established a solid foundation of economic and political stability, continuing its steady improvement in macroeconomic and fiscal indicators into the fourth quarter of 2024,” the report said. However, Tsoukalas cautioned that the economic challenges facing Europe will inevitably affect Greece as well.

“Investment and productivity remain key, particularly in high-value-added export sectors, combined with accelerated reforms across the economy,” PBO said. According to the report, investments, enhanced productivity, and reforms will be key to improving the current account balance – which is expected to deteriorate in 2024 – and to achieving a faster convergence of Greek citizens’ real incomes with the eurozone average.

The PBO’s report also offers a detailed assessment of Greece’s investment gap. For 2024, the capital stock is projected at €657.2 billion, €68.5 billion short of the historic peak of €725.7 billion in 2010. This represents a capital gap of 9.4% relative to 2010 levels.

To close this gap by 2030, investments will need to grow at an annual rate of 6.6%, the same as the average growth rate from 2017 to 2024. If investments grow at a slower pace of 4% annually, excluding Recovery Fund resources, the economy will not recover the 2010 capital stock until 2036.