April 15, 2016 / 3:25 PM / 3 years ago

Greece's primary surplus target must be realistic -IMF's Thomsen

WASHINGTON, April 15 (Reuters) - Greece’s primary surplus target for years to come must be realistic and the 3.5 percent of GDP goal set by its euro zone lenders from 2018 onwards is not, the head of the International Monetary Fund’s European Department Poul Thomsen said on Friday.

Unless it takes new measures, Greece will slump back into a primary deficit - the budget balance before debt servicing costs - of 1-1.5 percent of gross domestic product in 2016, Thomsen told a news conference.

“Greece’s fiscal adjustment since the beginning has been extraordinary... (but) since the start of 2014, Greece has found it difficult to sustain that adjustment,” Thomsen said.

“We had a primary surplus, at some stage getting close to 1.5 percent on an annualised basis, but this could not be sustained and we are back to a notable primary deficit of perhaps 1-1.5 pct this year, in the absence of new measures,” Thomsen said.

The euro zone bailout programme assumes that Greece will have to reach a primary surplus of 3.5 percent of GDP in 2018 and keep it there for decades.

“Even if Greece could get to 3.5 percent, we don’t think it is credible to assume that for decades, for many decades, Greece would maintain a surplus of 3.5,” Thomsen said.

“Greece is a country with huge unemployment and we question if it is plausible for a country with such high unemployment and social pressures to be running such big surpluses over many political cycles to come,” he said.

“So we are cautioning that the Debt Sustainability Analysis (DSA), the debt relief, need to be calibrated on something that we think is more realistic,” he said.

“We strongly believe that the DSA needs to be based on a lower target as far as calibrating the debt relief is concerned,” Thomsen said.

Thomsen said the discussion about what Greece needed to change now focused on its “exceptionally generous” exemptions in its personal income tax, that effectively exempted 55 percent of households, while the euro zone average was 18 percent.

Greece also had a relatively high income threshold from which tax had to be paid - 9,500 euros per year - more than in richer countries like Germany. He said that further tax rises would not work, but that Greece needed to broaden its tax base.

He also said that the IMF did not want Athens to further reduce discretionary government spending which was already among the lowest in Europe.

“As a result hospitals are complaining they don’t have syringes and busses are not driving because they don’t have spare parts,” Thomsen said.

“So we don’t think it is credible to have a programme that assumes a further reduction in that kind of spending,” he said.

“I hope we can reach an agreement soon,” he said. (Reporting By Jan Strupczewski and Balazs Koranyi; Editing by Andrea Ricci)

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