October 27, 2010
By LANDON THOMAS Jr.
LONDON — The mathematics of austerity are getting harder.
With economic conditions weaker than expected, tax revenue is coming up short of projections in parts of Europe. As a result, countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year by impatient bond investors.
Greece, for one, looks as if it will run a budget deficit for 2010 greater than the 8.1 percent of gross domestic product it agreed to as part of a rescue package from the International Monetary Fund and the European Union that amounted to more than $150 billion, according to a person briefed on the matter but not authorized to speak about it.
The adjustment, at worst, would result in a deficit of 8.9 percent of Greece’s output, this person said. Normally, such a small difference would not be cause for alarm.
But after the latest upward revision in Greece’s 2009 deficit — to about 15.5 percent from 13.5 percent of output — the miss has spurred investor fears that the Greek government will be unable to close the gap and that Greece may ultimately be forced to restructure its mountain of debt with foreign investors.
As word seeped into the market on Wednesday, Greek 10-year bond yields jumped to 10.3 percent, from 9.3 percent. That more or less reversed what had been an impressive bond market rally, when yields fell from more than 11 percent to just under 9 percent over the last month. The cost of insuring Greek bonds against a possible default also rose.
A spokesman for the Greek finance ministry declined to comment.
There has not been any suggestion from the I.M.F. or the European Union that this slip represents a lack of resolve by Prime Minister George A. Papandreou to maintain the harsh spending cuts, structural reforms and tax increases that lie at the heart of the Greek reform effort.
But it does highlight just how difficult it is for stagnating economies with rising unemployment rates to make fiscal adjustments exceeding 10 percent of their economic output in just a couple of years.
In Ireland, which is expecting its third consecutive year of economic contraction this year, the government says it will need an additional 15 billion euros in budget cuts to reduce its deficit from 32 percent of gross domestic product to 3 percent by 2014.
And in Portugal, the government is struggling to meet its deficit target of 9 percent of output as the economy continues to weaken.
Spain also faces a difficult task in slicing its deficit to 6 percent next year, from 11 percent last year, in the face of a slumping economy.
“All the leading indicators for the peripheral economies are negative, so it is logical that these countries will fall short of their projections,” said Jonathan Tepper, an analyst at Variant Perception, a London-based research boutique. “People tend to forget that when you are in a deflationary dynamic, your tax take will be going down.”
In Ireland, the deficit has been swollen by the cost of bailing out the country’s failed banks. But because there have been so many upward revisions in the deficit, investors are growing more doubtful that the government will be able to meet its target in the years ahead.
The deficit misses by Europe’s weaker economies also provide fodder for the critics of the I.M.F.-inspired programs who fear that these dire menus of spending cuts and tax increases will send economies into prolonged recessions from which they will be unable to recover.
Eurostat, the statistical agency for the European Commission, has had a team in Athens for a few weeks, digging through the Greek budget figures, and is expected to announce the final revision of the country’s 2009 deficit in mid-November — a change that could expose debt as more than its current level of 133 percent of G.D.P.
Eurostat’s investigation has the full support of the Greek government, which has said many times that it wants to put the nightmare of the ever-increasing 2009 deficit — initially estimated by the previous government at 5 percent — behind it.
So far, Greece has made solid progress in its austerity program, cutting expenditures by 11 percent through September from the comparable period last year. But revenue, always difficult to spur in an economy with a poor record of tax collection, has been hurt by this year’s 4 percent economic contraction and is up just 3 percent.
Government officials, while acknowledging that July and August were off target, are banking on increased taxes and measures to curb tax evasion to kick in during the second half.
Still, Greek officials are contemplating changes in their spending targets to reflect the lower revenue.
This year, spending cuts will make up two-thirds of the deficit-cutting plan, with tax increases the remainder. In 2011, the plan was for tax increases to constitute 60 percent of the fiscal adjustment, with spending cuts the rest.
Now there is talk within the Greek finance ministry of reversing this ratio. The view is growing that it will be easier and quicker to cut expenditures rather than raise taxes — an approach that has been accepted by many economists and lies at the heart of the British government’s deficit-cutting strategy.
Though such an approach may look good on paper and produce quicker results, the political and social consequences of further cuts in wages and public sector services could be severe not just for Greece but Europe as a whole.
A version of this article appeared in print on October 28, 2010, on page B1 of the New York edition.
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