Higher inflation seen

Government worried over likelihood of a vicious circle of price rises

The rising indirect taxes and the new, higher VAT rates (19 and 9 percent instead of 18 and 8 percent respectively) are expected to boost inflation and slow down economic growth.

Government officials were saying yesterday that the overall effect on inflation would be 0.7 percentage points. This opinion is confirmed by an Alpha Bank report, which also said average 2005 inflation would increase by 0.7 percentage points over earlier predictions, to 3.6 percent.

Officials fear, however, that the tax hikes could have an effect similar to the introduction of the euro in early 2002, which set off several rounds of price increases. The circumstances are not the same: In the case of the euro, consumers were dealing with a new currency and, because the currency was much stronger than the drachma, prices appeared deceptively “low” until one translated them back into drachmas. However, there is still scope for wholesalers and retailers to use the tax hike as an excuse to raise prices beyond what is reasonable.

Government officials were fearing that such a round of price increases, which would hurt the poorest, would create popular discontent similar to that which saw the Panhellenic Socialist Movement (PASOK) lose the March 2004 elections after nearly 10-and-a-half years in power. The same officials were saying, however, that pressuring businesspeople to keep prices lower would not produce results. What is needed is to further open up markets to competition.

There was also increased criticism yesterday, even within the ruling New Democracy party, that these measures should have been enacted earlier. Others say, though, that this would have clashed with the party’s rich pre-election promises and that, in any case, the government can still claim that the economic situation it inherited from PASOK was worse than it had thought. Critics within the government privately say that, with growth further slowing down, it would take painful spending cuts, or a sudden increase in private investment, to conform to European Union orders to reduce the budget deficit.

Two major employers’ organizations, the Federation of Greek Industries (SEV) and the Athens Chamber of Commerce and Industry (EBEA), reacted differently yesterday to the government’s Tuesday announcements. More critical, SEV remarked that the government’s measures stem from its inability to control spending in 2004.

“SEV believes that, in order to reduce the large public debt and to ensure that the new tax measures are temporary, the government’s policy must henceforth focus on a drastic reduction of primary spending, the implementation of an extensive program of privatizations, the sale of state property that does not contribute significant revenue to the budget and the necessary structural measures that will make the state operate more efficiently,” SEV said in a statement.

For its part, EBEA said that the measures were unpleasant but necessary. EBEA President Drakoulis Foundoukakos said that increasing indirect taxes was a “painful” measure that allows the government to gain extra revenues until its promises to cut spending and sell state enterprises are implemented.

Foundoukakos made six specific proposals for the government: first, extra inspections to ferret out tax evaders; a productivity-based pay policy in the public sector; limiting civil servant hirings and abolishing permanent employment status for new hires in public utilities; a reduction in primary spending by 1 percent of GDP per year over the next two years; extensive privatizations and corporate tax cuts.