The Greek Myth of Profligacy

The Fiscal Crisis in Greece Isn’t About Spending

The first lesson to be learned from the latest sovereign debt crisis is that nations need to get the revenue side of their balance sheets in order, write Michael Linden and Sabina Dewan.

Greek Prime Minister George Papandreou announces Greece's decision to request activation of a joint euro zone-International Monetary Fund financial rescue plan. Greece is undoubtedly in dire fiscal straits, but the blame does not lie with overspending. (AP/Tatiana Bolari)
Greek Prime Minister George Papandreou announces Greece's decision to request activation of a joint euro zone-International Monetary Fund financial rescue plan. Greece is undoubtedly in dire fiscal straits, but the blame does not lie with overspending. (AP/Tatiana Bolari)

It’s not the spending. The Greek fiscal situation is a mess, a big dangerous mess. But they didn’t spend their way into that mess and they won’t be able to cut their way out of it. It is easy, and for conservatives certainly tempting, to blame Greece’s woes on overspending. Robert Samuelson’s recent op-ed in The Washington Post even goes so far as to claim that the Greek fiscal crisis signals the “death spiral” of the welfare state. He then tries to extrapolate lessons from the Greek crisis and apply them to the United States. The facts belie both of these claims.

First of all, Greece is not the United States and the United States is certainly not Greece. Our nation boasts a fundamentally stronger and more diverse economy than Greece. And Greece has pushed its fiscal envelope much further and for much longer and now has less room to climb out of its hole without assistance from its euro zone partners. By contrast, the United States is in a far better economic state, with 3.2 percent growth in gross domestic product, a job market that is slowly but surely rebounding—with 290,000 new jobs created in April of this year—and total government debt at less than half the size of the Greek’s.

Second, when Greece is properly placed in the context of its EU partners and neighbors, it becomes clear that its spending is very much in line with European norms. Where Greece actually stands out is on the revenue side. In fact, the real problem facing the Greeks is not how to reduce spending (though surely that will have to be part of the solution) but how to increase revenue collections.

Before turning to the central problem facing the Greek government—its woeful lack of revenue—it is important to first cast aside the inaccurate claim that it was profligate spending that brought the Greek budget to its current state of disrepair. In 2009, government expenditures in Greece totaled 50.4 percent of GDP. While that is definitely high compared to the United States—we’re at about 38 percent of GDP, including state and local government spending—it is absolutely average among countries in the European Union.

In fact, total government spending for the European Union as a whole equaled 50.7 percent of GDP, actually a bit higher than Greece. Ten of the 27 countries in the European Union spent more than Greece did in 2009, several by as much as 5 percentage points of GDP (see Figure 1).

Average annual total government expenditures, as a share of GDP, 2001-2007

Greece’s location in the middle of the pack on spending is not some artifact of the massive recession. Over the past 10 years, Greece has consistently spent less, as a share of GDP, than the European Union as a whole. During the last economic cycle, from 2001 to 2007, Greek government expenditures totaled an annual average of 44.6 percent of GDP. Over the same period, the European Union as a whole spent an annual average of 46.6 percent of GDP. Germany, for example, spent an average of 46.7 percent of GDP over this period. Indeed, from 2001 to 2007, Greek average annual spending ranked precisely in the center of all EU countries, with 13 countries spending more, and 13 countries spending less.

Fundamentally, the argument that the Greeks spent lavishly and licentiously ignores the simple fact that Greek spending is and has been boringly average for EU countries. There are many other European countries that spend far more than Greece does but do not find themselves facing a fiscal crisis. Consider the counterexample of Sweden. By some measures, Sweden is Europe’s biggest spender. From 2001 to 2007, total government expenditures in Sweden averaged 55.2 percent of GDP, higher than any other country in the European Union, and in 2009 Sweden spent 56.5 percent of GDP, second highest in the European Union. And yet its budget deficit last year was a mere 0.5 percent of GDP.

Denmark, the only country to spend more than Sweden in 2009, ran a budget deficit of less than 3 percent of GDP. How can this be? Countries such as Sweden, Denmark, Finland, and even France spend far more than Greece does, but they pay for that spending with tax revenues. The problem is that even though Greek spending is studiously average, its tax collections are definitely not.

In 2009, Greece collected just 36.9 percent of GDP in total government revenues. That was far below the overall EU total of 43.9 percent. Greece’s anemic tax collections ranked them seventh from the bottom among EU countries, with only Spain, Ireland (two countries also facing big budget predicaments), Lithuania, Latvia, Slovakia, and Romania below them (see Figure 2).

Total revenue collected, as a share of GDP

This has been a longstanding problem in Greece. From 2001 to 2007, Greece consistently collected far less in revenue than a typical EU country. For the European Union as a whole, annual government revenue averaged 44.4 percent of GDP. For Greece, that average was 39.4 percent. During that period, Greece was one of only four nonformer Eastern bloc countries—out of 17 in the European Union—to generate less than 40 percent of GDP in revenue. The only other three were Spain, Ireland (these two again), and Cyprus. Consider Sweden again, with its more than 55 percent of GDP in government spending. Sweden collected an average of 56.3 percent of GDP from 2001 to 2007, a whopping 17 percentage points higher than Greek revenue collections (see Figure 3).

Spending and revenue in four EU countries, as a share of GDP, 2009

The current crisis has cast a light on Greece’s shadow economy and massive illicit financial flows. There are varying estimates of the size and impact of the country’s underground economy. Some suggest that a quarter of Greece’s GDP comes from its underground economy and estimates are that Greece lost an estimated $160 billion in unrecorded transfers through its balance of payments over the last decade ending 2009.

Greece is undoubtedly in dire fiscal straits, but the blame does not lie with overspending. On the contrary, Greek spending is exactly in line with what one might expect from a modern, Western member of the European Union. Its tax revenues, on the other hand, are clearly on the low end. Average spending plus below average revenues equals large, persistent deficits, and that is precisely what happened in Greece.

Over the next several months and years, Greece may well be forced to cut back on some of its government services, but it will also have to find ways to bring its revenue collections up to levels more in keeping with its membership in the European Union. Pinning the blame on the spending may be easy, it may be politically convenient, and it may be satisfying, but it’s wrong.

Michael Linden is Associate Director for Tax and Budget Policy at the Center for American Progress. Sabina Dewan is Associate Director of International Economic Policy at the Center. To read more of our economic analysis and policy recommendations go to the Economy page on our website.

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Michael Linden

Managing Director, Economic Policy

Sabina Dewan

Senior Fellow