Greece readies new measures to plug budget hole - The Best from Greece

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Posted on: 30/Mar/2011

Budget slippage and local newspaper reports that last year's fiscal gap may have topped 10 percent of gross domestic product, instead of the announced 9.4 percent, are piling pressure on the government as it readies a medium-term plan to get the deficit down to 2.6 percent of GDP by 2014.

Standard & Poor's downgraded Greece's sovereign debt deeper into junk territory on Tuesday, saying plans to create a permanent bailout fund for the euro zone, agreed by euro zone leaders last week, increased the likelihood of debt restructuring by Greece.

The Greek government wants to finalise its new budget plan by end-March, ahead of a visit next week by officials of the European Union and International Monetary Fund, which are providing Greece's 110 billion euro international bailout.

"Revenue is the most important issue because Greece is far from target. Tackling tax evasion and tax fraud is crucial," said an official close to Greece's international lenders, who declined to be named.

Greece has already committed to a wide range of austerity steps and structural economic reforms in an effort to regain fiscal health and make its economy more competitive.

But the January-February central government budget gap widened 9.0 percent to 1.028 billion euros and revenues have been missing indicative targets, so Athens must take fresh action to secure the next EU/IMF loan instalments.

"Of the measures being considered, two thirds will focus on spending cuts and one third on a rise in revenue. Linking tax exemptions to income criteria is something we should look at, but there are no final decisions yet," a government official who did not want to be named told Reuters.

Among steps being considered are cancelling income tax exemptions, such as those for interest on a first mortgage and school tuition for people earning higher incomes. No cut-off levels have been specified.

Other moves may include cuts in supplementary allowances at state-owned firms, and merging public sector entities.

Oil tax

But the government is having second thoughts about plans to lift the heating oil excise tax up to diesel levels, fearing the blow to household budgets after the surge in global oil prices.

The plan was for the measure to go into effect from October and yield around 400 million euros.

"We are aware of the problem this could create and are re-assessing this proposal to see if we can replace it. We haven't decided if it will be adopted," Deputy Finance Minister Philippos Sachinidis told state TV Net.

The government, whose popularity has declined because of tough austerity measures, has said the new steps will not include cuts in wages or pensions.

"The total tightening for this year may be just too much for the economy to withstand, meaning the deficit target is unlikely to be met," said Citigroup economist Giada Giani.

The higher-than-expected January-February budget deficit triggered the resignation of the ministry's general secretary for taxation last month, with the government appointing the head of its financial crimes unit to the job.

Meanwhile, the conservative political opposition, which voted against the bailout memorandum, is pressing the government for moves to bolster growth and avoid raising taxes.

"The pie keeps getting smaller and the government is trying to take more revenue. We need to grow the pie to have more revenues," said New Democracy's shadow finance minister Christos Staikouras.

A medium-term package of fiscal and structural measures to ensure 2012-14 targets are met will be cleared by the cabinet by mid-April. The EU Commission and the IMF said in their latest review of Greece that permanent measures amounting to about 8 percent of GDP would be needed for this period.

"The overall objective (of the plan) is to show how Greece will stick to the targets," said the official close to Greece's international lenders.

"There has to be a very solid plan on revenues because it is the origin of deviations that can lead to a questioning of the sustainability of the programme."

Officials of the EU, the IMF and the European Central Bank are expected in Athens next week to discuss the plan, although no date has yet been fixed for the meeting and it is not clear exactly which officials will come.


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