Real income growth, a mild improvement in the global economic outlook and increasing disbursements of European funds will support growth over 2024-26 (Table 1). The recovery of external demand will allow exports to gain momentum. Further improving bank health and growing support from EU Recovery and Resilience Funds will allow credit and investment to pick up. Growing real wages and sustained employment gains will support household disposable incomes, consumption and investment. Unemployment is expected to decline further.

Risks to economic activity are tilted to the downside. Geopolitical tensions could intensify and lead to a rise in energy prices, which would weigh on domestic and global demand. Wage growth exceeding productivity gains could dent previous competitiveness gains and exports. Delays in the implementation of the Recovery and Resilience Plan would reduce investment.

Public debt amounted to 163.9% of GDP in 2023 and significant primary surpluses over many years are needed to reduce it. With high investment needs, raising spending efficiency and reallocating spending are essential (Figure 2). Broadening tax bases, improving tax compliance and shifting the tax burden on labour towards other taxes would help.

Public debt has declined but remains high. Strong growth, steady primary surpluses and high inflation helped reduce the debt-to-GDP ratio from 209.4% in 2020 to 163.9% in 2023, using the Maastricht definition. A favourable debt structure is limiting the rise of debt servicing costs. With the phase-out of inflation-support measures and the pick-up in economic activity, public debt relative to GDP is projected to decline further by 2026.

Greece should prepare to expand domestic funding of public investment once the current EU funding programmes expire. Reining in staff expenditures and maintaining efforts to contain pension expenditures would allow a gradual shift of public spending towards supporting growth and equity. Completing the ongoing efforts to build a comprehensive human resources management system and promote more mobility among civil servants can raise spending efficiency, supported by regular spending and public investment reviews. Reallocating spending towards training programmes and in-kind support for families would also improve support for unemployed workers and women, as well as labour market outcomes. Further strengthening whistleblower protection would reduce risks of corruption.

Shifting the tax structure towards more growth-friendly taxes and broadening the tax base would support fiscal sustainability and help to reduce high tax rates. Tax compliance is improving on the back of policies to foster electronic transactions, but significant shortfalls remain. Coverage of consumption and recurrent property taxes has been broadened, but many reduced VAT rates and exemptions remain. The sizeable tax expenditures should be evaluated regularly to phase out those that do not benefit low-income households or raise tax compliance costs. Moreover, strengthening the relatively low taxes on goods with negative health impacts could boost health outcomes, public revenues and equity.

Recent tax and social security contribution cuts have reduced the labour income tax wedge. To ease the tax burden on low-wage workers further and mitigate the impact of the ongoing labour-cost increases around the minimum wage, Greece could consider introducing in-work benefits and reducing employer social security contributions for low-wage workers.

Despite recent progress, productivity remains weak. The productivity gap between large firms and micro and small enterprises is large, with many of the latter failing to grow and adopt new technologies. Skill shortages have increased but the employment rate remains low, notably for women, youths and low-skilled workers.

Lifting productivity and employment growth hinges on better skills and stronger investment (Figure 3). Micro firms account for close to 47% of business employment, and their low investment and limited management skills have held back productivity gains. Continued reductions of still high regulatory barriers in some services sectors, better access to finance, and improving lifelong learning opportunities would support employment, business innovation and growth.

The past few years have seen ambitious policy efforts to boost productivity and employment. This includes cutting business and labour taxes, better incentives for investment and innovation, along with structural reforms in the labour market and reforms to the Public Employment Service (DYPA), apprenticeships and vocational training. The new insolvency framework and the ongoing reform of the judicial system are likely to shorten judicial processing times and accelerate the resolution of non-performing loans.

The recent employment momentum must continue to achieve more inclusive growth. The capacity of public employment services to tailor individual employment support programmes is improving, which can particularly help more vulnerable jobseekers. Still, large numbers of registered jobseekers with weak labour market attachment, scarce funding for Active Labour Market Policies (ALMPs), and inefficiencies in the unemployment benefit system hold back further progress. Increasing the number of specialised counsellors, redirecting funding towards ALMPs and further use of jobseeker profiling would improve job-search and training support. Ensuring the quality of training providers through regular evaluations, and improving quality assessments and certification of adult learning courses could support this. The unequal distribution of caretaking responsibilities limits labour market opportunities for women. Stepping up the provision of early childcare services would allow more women to join the labour market and could be financed by reducing birth grants. At the same time, establishing a national system for the Recognition of Prior Learning would help migrants labour market integration.

Raising productivity requires more investments in human capital from an early age. Educational outcomes and adult skills are lagging behind other OECD countries, according to the PISA and PIAAC Surveys. Mismatches between field of studies and labour market needs remain high, exacerbated by a low take-up of Vocational Education and Training (VET). Improving coordination among social partners and VET institutes about training content and more work-based learning will help to provide workers with the skills needed by firms. Enhancing counselling to guide students’ study choices from an early age on would also better align skill development with labour market needs.

Private investment, albeit increasing, has been low for many years. Scarce financing, a high share of small firms, and limited firm turnover are contributing factors. The streamlining of complex administrative processes as part of the public sector’s digitalisation efforts is welcome. Rising foreign direct investment inflows create opportunities for domestic firms to improve their productivity and expand their markets by developing local value chains. However, regulations can be further improved by ensuring the timely consultation of stakeholders on draft legislation, and formalising the review of existing regulations. This would also help to reduce still high restrictions in professional services, including for lawyers and notaries.

Bank lending to businesses has improved, but tighter financial conditions are slowing recent progress. The Hercules securitisation scheme has enabled banks to shift much of their non-performing loans off their balance sheets and improved the quality of their loan portfolios. Accelerating the resolution of remaining non-performing loans on banks’ and servicers’ balance sheets would release assets pledged as collateral and relieve debtors, supporting credit growth and investment.

The rapid implementation of the new insolvency framework, and efforts to improve judicial processing times, are key to ensure swift restructuring or insolvency processes. To expand access to finance, the government has deployed loan guarantees and is on-lending its NextGenerationEU loans to fund new private investments. Such loan guarantee schemes and the R&D tax credit should be rigorously evaluated to ensure the best use of public resources.

Greece has cut emissions over the past decade and renewable energy generation is expanding rapidly. However, reaching emission targets for 2030 while raising living standards will require further decoupling of emissions from economic activity (Figure 4).

Achieving Greece’s ambitious climate targets requires a broad strategy, including price signals and regulations. Despite rapid progress, more investment in expanding renewable energy sources is needed. Strengthening price signals will be key to prioritise low-cost emission cuts. Fossil fuel subsidies remain high and should be phased out to harmonise effective emission prices. Opportunities to phase out fossil fuels will be provided by continued progress with connecting islands to the mainland grid to expand access to alternatives to fossil fuels. Tighter regulations, complemented with financial support for vulnerable groups, can steer households and business to invest in greener technologies.

Electricity generation from renewable sources needs to accelerate further. Greece aims to almost double the share of electricity generated from renewable sources by 2030, while electricity demand is set to grow. A mix of policies offering financial support and cutting red tape has facilitated a rapid scale-up of generation capacity, but there is room for further improvement, including by implementing the planned one-stop-shop for renewable energy projects and speeding up procedures for obtaining environmental licenses.

Greece needs to adapt to a hotter climate. Extreme weather events, such as the 2023 flood in Thessaly, are already causing large economic damages and may well become more frequent and severe. Adjusting existing structures can limit damages but takes time. Incorporating climate hazard planning into infrastructure projects now is crucial to enhance future resilience.