Greece promises to slash deficit to 2 percent in 2013, has Plan B for tougher fiscal cuts

Greece vows deficit cuts, prepares emergency plan

ATHENS, Greece — Greece’s cabinet on Thursday approved an economic recovery plan promising to drastically reduce its huge budget deficit to 2 percent of annual output in 2013, and warned it could hit Greeks with additional taxes and spending cuts if needed.

Finance Minister George Papaconstantinou said the blueprint, meant to assuage increasingly jittery European Union partners, will be submitted to the EU and the European Central Bank Friday.

“There is no question of the document’s rejection,” he told a press conference.

Papaconstantinou said a back-up plan for further spending cuts and tax hikes was requested by the European Union, and follows visits to Athens by EU financial officials and ongoing talks with IMF experts.

“If additional measures are needed to meet our targets, those measures will be taken,” he said.

The plan provides for a gradual reduction from 2012 in Greece’s crippling national debt — expected to reach 120.4 percent of GDP this year.

The budget deficit, meanwhile, is set to first drop below the EU ceiling of 3 percent of GDP in 2012. By comparison, budget overspending is projected at a massive 12.7 percent in 2009.

Greece is struggling to regain market credibility after sharply revising deficit forecasts and suffering a string of international credit rating downgrades. It is also grappling with a spike in unemployment that could make bolder spending cuts difficult.

The annual jobless rate rose to 9.8 percent in October, up from 9.1 a month earlier and 7.4 percent a year earlier, according to figures released Thursday. Government officials have warned unemployment could be considerably higher in 2010.

Papaconstantinou also said it could take months to convince international markets — on which Greece depends for its borrowing — that the plan will work.

“The question of persuading the markets is not something that can be achieved from one day to the next,” he said. “Nothing that we announced today would have changed that. There will be a difficult period of adjustment … In six months, it will be more clear that this is not merely an exercise on paper.”

Papaconstantinou said the economy is expected to contract for a second year in 2010, before returning to growth in 2011.

“We believe this scenario is realistic … mainly because the reduction of the deficit by itself will have a stimulating effect on economic growth,” Papaconstantinou said.

The plan calls for a total euro7.3 billion ($10.6 billion) boost in revenues this year, mostly through tax reform, and a crackdown on tax and social security cheats. At the same time, spending will be reduced by euro3.7 billion ($5.4 billion) — more than a third of which will be saved in state hospital spending.

Associated Press Writer Nicholas Paphitis contributed to this report.