International Monetary Fund said on Wednesday that a medium-term budget strategy paper, which will set annual spending ceilings for individual line ministries and fiscal balance targets for all general government entities through 2014, is under preparation.
It will also define measures to be taken in support of these targets. IMF estimates that some 8% of GDP in permanent measures will be needed, some of which have already been identified in the Fund’s May 2010 program.
The measures supporting the medium-term strategy will be articulated in plans covering several sectors and areas of government spending.
State enterprises: the plan will lay out, by enterprise: tariff increases, operating cost reductions, investment prioritizations, and wage, benefit, and employment adjustments to improve financial results.
Extrabudgetary funds: the plan will aim to simplify the structure of the public sector and improve the flexibility of the budget.
Tax policy reforms: it will aim to simplify the tax system, raise revenue in a progressive manner, and facilitate more effective tax administration, while supporting growth and investment.
The public wage bill: a preliminary report unveiled a complex system of wages and benefits, overall levels of compensation above private sector comparators, and significant misallocation of human resources. To reduce excess employment in the public sector, the plan will focus on attrition, tighter policies for contract workers, and vacant job post cancelations.
Public administration: the plan will aim to identify services and programs which can be rationalized and to streamline public organizations to eliminate overlapping responsibilities.
Social spending reform will identify ways to streamline social programs to eliminate duplication and make them better targeted.
Public investment: the plan will prioritize projects, and estimate in each instance possible savings to the budget from rescheduling projects.
According to IMF, there remain substantial risks to the program. These have been well enumerated in program documentation to date. At present, the most notable risks include:
– Delays in implementing needed fiscal-institutional and structural reforms. This could be due to either political constraints or administrative capacity constraints. Fiscal structural delays could leave the deficit stuck at an unsustainable level, while macrostructural delays could undermine the recovery. A tailored DSA scenario (Appendix I), capturing the possible macro impacts of delays, suggests that debt could be brought under control, albeit at a significantly higher level, provided financing could be sustained. Clearly, however, delays would be likely to also undermine the authorities’ efforts to regain market access. The tight implementation schedule supported by the program, and extensive technical assistance from both the Fund and EC, are critical to mitigating this risk.
– Inability of the government to re-access markets even with the program on track. Continuing problems in the euro-area periphery could lead to such an outcome, but it may also prove difficult to convince markets to reengage before the economy and debt dynamics have turned the corner. A successful conclusion to the present discussions in Europe about a more permanent crisis management framework would help mitigate this risk: Greece could benefit considerably from a comprehensive European solution and the improvements in overall financial market climate this could bring. A shift to an EFF and to similar (or better) terms by European Union countries, would also help, by allowing a more gradual return to the markets.
– An excessively fast bank deleveraging process. Too fast a pace would almost certainly have negative macroeconomic and fiscal repercussions, and could through these channels also undermine the banking system. The constraints placed on the aggregate of the plans—consistency with the program’s macro and fiscal framework—shouldhelp mitigate this risk.
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