First-half Greek budget data are consistent with achievement of the target of reducing the state primary deficit to 0.5% of GDP in 2012. Recent improvement, however, reflects a large cut in expenditure that may yet prove unsustainable.

The primary deficit totalled €3.71 billion in the year to June, down from €10.53 billion in the prior 12 months, implying a fall from 4.8% to 1.8% of GDP – see chart. The rate of decline, if sustained, is consistent with meeting the target in the 2012 Supplementary Budget of a deficit of €1.09 billion or 0.5% of GDP in calendar 2012. (Greece’s IMF programme targets a primary deficit of 1.0% of GDP in 2012 but this is on a wider general government basis including local governments, social security funds etc.)

The overall state deficit has declined by less, totalling €22.21 billion or 10.6% of GDP in the year to June after €25.03 billion or 11.3% in the prior 12 months. Interest payments rose significantly over July 2011-March 2012 but are now falling year-on-year as a result of the PSI debt restructuring. The Supplementary Budget projects an interest bill of €13.05 billion in 2012, down from €16.35 billion last year, in which case the overall deficit will decline to €14.14 billion or 6.9% of GDP, assuming that the primary shortfall target of 0.5% is met.

The fall in the primary deficit is the result of a substantial cut in expenditure that has offset weaker tax receipts – non-interest spending and revenue fell by 18.8% and 10.5% respectively in the 12 months to June from the prior year. The risk is that the spending decline partly reflects a backloading of payments that will appear in the second half of the year rather than a sustainable reduction. The suggestion, nevertheless, is that the last two Greek administrations achieved greater fiscal progress than widely expected, even if structural reform efforts have fallen short.