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Posted on: 17/Nov/2009

Greek Government focuses on containing the deficit, not boosting growth
Measures to up tax revenue will harm consumption, main component of GDP

The stock market has already been rocked by the novel idea of charging profitable companies to fund a special allowance to low-income groups.
 The new socialist government wanted to tackle Greece’s large budget deficit by boosting the economy, collecting a good proportion of pending taxes and ensuring a fairer redistribution of income by taxing the rich. About a month and a half after coming to power, it is clear its former aspirations for boosting the economy have taken a back seat to the crude reality of cutting the budget deficit.

The new government seems to understand that its grace period with the public and vested interests will not last for more than a year but does not give the impression it had a workable plan or the teams of experts in place to implement it.

In other words, the new administration may be able to avoid the mistake of the former conservative government, which avoided implementing a front-loaded economic program of reforms to reinvigorate the economy and partly fix some of its long-standing fiscal and other imbalances when it won the elections in a landslide back in 2004.

To be fair, the new government certainly has some ideas on how to go about it and the political will to apply some of them, such as the distribution of a special allowance to low income groups financed via a one-off tax on profitable companies and owners of real estate property worth more than 600,000 euros.

However, given the lack of a concrete economic plan and a shortage of experts to implement it, it must rely on the same state bureaucrats used by former governments to no avail.

It is no coincidence that the same individuals who apparently agreed with the former conservative government’s estimate of a budget deficit of 6 percent of gross domestic product this year had no problem accepting its upward revision to 12.5 percent or more of GDP a little later. Of course, the socialist government’s decision to pay off old debts to suppliers of public hospitals and other state organizations contributed to the expansion of the budget deficit in 2009 and the previous years. However, this in itself does not fully explain why the estimate about the size of the budget deficit deviated so much from the previous one.

Things may get more complicated if it is true that public hospitals and others report their expenditures to the finance ministry on a cash basis and do not provide information about the contracts on which these payments are based. This could dramatically change the allocation of sums paid in different years and alter the size of the general government budget calculated under the accrual method of accounting.

Still, the new government does not have the luxury of changing the state bureaucrats who, after all, enjoy the privilege of lifetime employment. Faced with the demands of the European Commission for tougher fiscal measures to reduce next year’s budget deficit, seen at 9.4 percent of GDP in the 2010 draft budget, and the need to satisfy the country’s borrowers when it taps international capital markets for some 40-50 billion euros next year, the government has few options.

Judging from the economic measures announced so far to cut the budget deficit and those leaked in the local press, the new government appears to rely on measures to increase taxes rather than spending cuts or a combination of both.

Finance Minister Giorgos Papaconstantinou has tried to justify this by saying that Greek tax revenues as a percentage of GDP are some 5 percent lower than the EU average, implying massive tax evasion. This is true, but the best way to succeed in this endeavor is not to tax more heavily employees and pensioners who pay their dues.

Rather, it is to catch the medium and small businesses which are known to evade tax and show to the general public that their taxes are not going to fund new hiring in a bloated public sector or subsidize state enterprises of dubious effectiveness and low productivity.

The best way to go about tackling Greece’s fiscal problem is not to tax real estate more heavily by raising the respective rates and additionally increasing by 20 to 30 percent the values of property on which taxes are calculated, at a time when the real estate market is in poor shape.

By increasing certain indirect taxes while upping taxes on property and salaried employees earning more than 30,000 euros per year, the government is undermining its previously stated goal to cut the budget deficit by boosting the economy. This is because all these fiscal measures hurt consumption, the biggest component of GDP, by reducing disposable income and lowering confidence. If expectations and psychology are important in shaping the economy, the new government may already be losing the battle.

Article Author Dimitris Kontogiannis source


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