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Greece unveils more cuts in 2011 budget

By Elena Becatoros

Associated Press

Published: Thursday, Nov. 18 2010 10:05 a.m. MST

ATHENS, Greece — Crisis-hit Greece pledged Thursday to slash another €5 billion from its deficit next year, making deeper cuts than planned in the 2011 budget to ensure it sticks to the terms of an international rescue deal.

The government originally aimed to cut next year's deficit by €1.5 billion, but was forced to increase the amount to €5 billion after failing to meet revenue targets this year and seeing its 2009 deficit figures hiked, which had a knock-on effect on 2010.

The deficit will be driven down from 9.4 percent of gross domestic product this year to 7.4 in 2011 by cutting back health and military spending and drastically reforming state-run companies allowed to run up debts for decades.

Despite the revision, Finance Minister George Papaconstantinou promised to return to bond markets next year, and hinted at possible public sector job cuts for the first time. A worse-than-expected recession in 2011 is also likely to add pressure on revenues.

Greece's economy is under strict supervision to ensure it meets the terms of a €110 billion rescue loan package from the International Monetary Fund and other EU countries using the euro. Excessively high interest rates demanded for its government bonds have effectively locked the Greece out of the international market, and without the rescue loans it would have already defaulted on its debts.

"This is a difficult budget that continues on the course of the previous year, one that continues the effort after the country could no longer borrow on the market, one that strives to maintain job creation and growth," Papaconstantinou said.

Greece cut this year's deficit by 6 percentage points, better than the targeted 5.5 percentage point cut, and the minister said his country's "fiscal adjustment is not just unprecedented in Greece and unprecedented in the eurozone, it goes beyond what was asked of us."

Earlier this week, the EU revised last year's deficit upward to 15.4 percent of gross domestic product — or €36.15 billion — from 13.6 percent. That in turn pushed up this year's projected deficit to 9.4 percent instead of the original 8.1 percent target.

Papaconstantinou insisted the new budget would "ensure that targets are met — I stress are met fully — so that we can continue to freely draw money from the support fund of €110 billion."

Some analysts said that while the cuts would keep Greece on track to meet the conditions of the three-year EU/IMF bailout, the country still faced problems further down the line.

"The Greek Government's 2011 budget should be enough to ensure that it can continue to tap its €110bn bailout facility, but it does nothing to improve the medium-term outlook for the economy and public finances," said Ben May, European economist at Capital Economics.

The budget also forecasts a sharper recession next year than originally predicted, with the economy expected to contract by 3 percent compared to the originally forecast 2.6 percent. This follows from a 4.2 percent contraction this year.

"With the economy likely to remain in recession well beyond 2012, we think that the debt to GDP ratio could eventually exceed 170 percent of GDP, implying that a restructuring of government debt is eventually all but inevitable," May said.

Papaconstantinou said the government's aim of returning to the markets next year remains.

"The reason this is important is because our return to growth is dependent on our ability to return to the markets, and regain international trust," he said.

The budget includes cuts in operational and wage costs at loss-making state-run enterprises, health care and defense. Specifically, it aims to save €2.1 billion in the health sector by reducing spending on medication and procurement, €800 million from public corporation restructuring and to cut €500 million in defense spending. It also says it will save €100 million by not renewing contracts for 10,000 short-term public sector workers. Pensions and wages will remain frozen.

Although he stressed it was not the government's aim to cut public sector jobs, Papaconstantinou implied it was a possibility.

"To reduce the deficit in a state enterprise, you either have to increase revenues or reduce costs," he said, adding that there were five such companies where payroll costs exceeded revenue.

"Obviously this cannot continue," Papaconstantinou said. "We are not starting out with plans to cut jobs, but each (public enterprise) will be considered case by case. It is not our intention to wipe out jobs, but to protect them."

The budget also increases the lower bracket of consumer tax from 11 percent to 13 percent — although VAT in the vital tourist industry and medications will be cut to 6.5 percent from 11 percent.

The budget forecasts primary surpluses from 2012 — meaning the government will be making more than it spends, leaving aside interest payments on the vast public debt.

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Associated Press writers Derek Gatopoulos and Nicholas Paphitis in Athens contributed.

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