MacroScope

A tale of two budgets

 

It’s deadline day for euro zone member states to submit their 2014 budget plans to the European Commission for inspection and we’re waiting on Italy and Ireland.

Having survived Silvio Berlusconi’s attempt to pull the government down, Prime Minister Enrico Letta’s coalition has to overcome differences on tax and spending policy.
The aim is to agree a 2014 budget that reduces labour taxes by some 5 billion euros but also undercuts the EU’s 3 percent of GDP deficit limit, so spending cuts will be required.

Rome has a chequered track record in that regard. The cabinet will meet at 1500 GMT to try and agree a comprehensive package. A Treasury source said the scale of tax cuts would be dictated by how much the various government ministries are prepared to forego.

The better news is that a modest return to growth is expected next year and borrowing costs remain low by the standards of 2011 and 2012.

Ireland is on course to exit its bailout programme by mid-December and may even eschew a financial backstop from the EU to help it make the transition. But that does not mean its problems are over. It needs growth to pick up markedly to bear down on debt while its banks are still beset with bad property loans. We already know Finance Minister Michael Noonan expects growth to accelerate to 1.8 percent in 2014 from 0.2 percent this year, which will help to bring the budget gap down to 4.8 percent of GDP.

Greek turning point?

Greece will unveil its draft 2014 budget plan which is expected to forecast an end to six years of recession.

The draft will include key forecasts on unemployment, public debt and the size of the primary surplus Athens will aim for to show it is turning the corner. The government has said any further fiscal belt-tightening will not bring cuts in wages and pensions and that savings will be generated from structural measures.

If even Greece has passed the worst then maybe the euro zone crisis really is on the wane. The FT reports that billionaire John Paulson and a number of other U.S. hedge funds are investing aggressively in Greece’s banking sector, expecting it to get off its knees – an interesting straw in the wind.