Greece must move quickly on economy

By Andrew Dean (1)

It may be reassuring to see signs of an end to the global economic crisis but for Greece the real work of assuring continued strong economic growth is just beginning. The global crisis has exposed the underlying structural problems in the Greek economy that had been masked during recent years by easy credit, low interest rates, the booming housing market and the widening external deficit. The new government is well aware of the vulnerability of the Greek economy but is trapped by the poor state of public finances. Government debt is close to 100 percent of gross domestic product (GDP) and the budget deficit is now probably well above 6 percent of GDP. This limits the government's ability to support activity, protect the vulnerable and take measures to strengthen the economy for the future. The outlook for the years ahead is worrying - particularly as the level of European Union structural funding is expected to fall and an increasingly aging population will place further burdens on government budgets. The government needs to bring the public finances under stricter control during its legislature. There is no other choice. But timing is crucial. Too ambitious deficit reduction too early, for instance by raising taxes, could worsen the recession or slow recovery. In fact, rather than focusing too much on the short term, it will be critical to make a credible commitment to improve public finances on a permanent and sustainable basis. Such a commitment is needed to restore confidence in the Greek public finances, ensure that future governments have room to help the economy in an economic downturn and improve fairness among generations. The young of today should not have to pay the large debts run up by their parents. In our Organization of Economic Cooperation and Development (OECD) Economic Survey of Greece, published in July, we estimated that to bring the government debt to below 60 percent of GDP in 10 to 15 years, when the full cost of population aging begins to kick in, the budget deficit will need to be eliminated within the next five years. Budgets thereafter will need to be in surplus. An adjustment of this size requires deep structural fiscal reforms, not temporary measures, which were too often used in the past. First, sustainability calls for improving the tax system which is among the least able to collect taxes in the OECD. This requires a resolute fight against tax and social security contribution fraud. Tax evasion remains widespread, especially among the self-employed. The repeated tax amnesties of the past only discouraged compliance, and this policy should be stopped. Second, government spending has tended to increase constantly in recent years but must now be tightly controlled. This requires cutting administrative costs, controlling public-sector wage increases, slimming the public sector down and reforming loss-making state enterprises. Third, longer-term fiscal viability calls for further pension reforms, including revision of the parameters for pension calculations and new measures to reduce incentives for early retirement, which are among the most generous in the OECD. This reform is long overdue. Greece can draw on the experience of similar reforms already implemented in a number of other countries. If such reforms are not carried out, public pension costs are estimated to rise to 24 percent of GDP by 2050 from 11.5 percent in recent years. Fourth, renewed efforts are needed to enhance the efficiency and quality of public services, in particular in the education and health sectors. In these domains, the OECD puts forward a number of specific suggestions of measures based on international evidence: to raise the education outcomes of secondary schooling, to meet people's expectations regarding the quality of primary healthcare services and to alleviate the heavy burden of private health spending, including high informal payments. It is urgent for Greece to improve the financial situation and the efficiency of its public sector. A well-functioning public sector can play a central role for modernizing the economy and maintaining a high economic growth rate, an objective that would also be helped by a more flexible labor market and more competitive product markets. In this spirit, the OECD stands ready to continue to support the Greek authorities with its know-how and policy advice. (1) Andrew Dean is director of country studies at the OECD Economics Department.