Political will needed to fill fiscal gap

Greece will likely have to take more austerity measures to fill the 2014 fiscal gap, putting at risk next year’s projected anemic economic growth rate. This is not good news for the economy or the coalition government because it will increase the social and economic costs of adjustment. The combination of excessive austerity and unfair distribution of the burden on private sector employees and property owners in large cities is set to breed discontent, undermining the fiscal adjustment program.

The government will have its hands full over the next couple of months. First of all, it will have to reach an agreement with the chief auditors of the European Commission, the International Monetary Fund and the European Central Bank – known as the troika – on the future of the defense industry and other prior actions to secure the release of the next bailout tranche of 1 billion euros in the next couple of weeks. This will undoubtedly cause a political stir, especially if all three defense companies (Larco, EAS and ELVO) close down.

However, the political and social repercussions will be small and manageable compared to the expected uproar from any new measures needed to fill next year’s fiscal gap, estimated at 2 billion euros by the troika. The government is in a difficult position for two reasons. First, to convince the people to go along, it had told them there would be no new austerity measures when it approved spending cuts and tax hikes in excess of 13 billion euros for the 2013-14 period. Second, it is clear new austerity measures will bite into disposable incomes, threatening next year’s projected economic recovery after six years of recession.

Outsiders may argue the government should have never told Greeks there would be no new austerity measures. However, that is easier said than done, knowing the country’s fiscal effort amounts to 30 percent of GDP or more since 2010 and sentiment – an important factor in determining the economic environment – would have been dealt another blow, making the economic turnaround more difficult.

On the other hand, the government is responsible for creating a fiscal gap of 600 million euros or more in 2014 by catering to special interest groups. This is the result of postponing (or canceling) the decision to save 250-330 million euros by including the “uniformed” officers’ pay – namely the armed forces, police and coast guard – in the new “special wage” grid of the public sector and not imposing a new tax on the sales of companies relating to the self-employed. Interestingly enough, the government has said it will distribute the portion of this year’s primary surplus above target to people on low pensions, the “uniformed” officers and the judges. It has paid a bonus of more than 100 million euros to the judiciary body this year.

Still, the fiscal gap of 2 billion euros, as projected by the troika according to government officials, is quite large. The government may be able to extract some savings from the proper implementation of the wage grid in the public sector since figures submitted by some ministries to Parliament show unusual disparities. In one case, employees with elementary education at one ministry were getting more on average than their counterparts with university degrees at others. But some doubt whether there is the political will to do so. It could also save more by rationalizing the system of supplementary pensions and lump sums paid to employees upon retirement, with the government seemed determined to go ahead.

Even so, more measures, whether they be called austerity or structural, will have to be taken to close the remaining fiscal gap, assuming it is indeed 2 billion euros. These measures will reduce disposable incomes and undermine weak economic growth next year when the real GDP is forecast officially to grow by 0.6 percent in 2014 from a downwardly adjusted 4 percent or lower this year.

Undoubtedly, the government missed an opportunity to raise lots of money by fairly taxing landowners when it designed the new property tax. But it seems to have bowed once again to pressure from farmers’ groups and others so the tax on agricultural land is expected to raise some 115 million euros, or just 4 percent, out of the 2.9 billion euros expected from the new property tax.

It is noted that farmers are taxed very lightly compared to others in Greece. In our view, the revenues raised from taxing agricultural land should account for at least 10 percent of the total amount in a country with reportedly 60,000 square kilometers. Tax should be based on the value of the land, mainly determined by the revenues it generates. For example, a plot of 1,000 square meters producing strawberries generates 10,000 euros per year after costs, according to knowledgeable people, and should be taxed more than 1,000 sq.m. of wheat, which generates peanuts.

Consequently the state has shifted the tax burden to property owners in urban centers, particularly the big ones, where unemployment is very high and the cost of living has soared. Therefore, it has increased the likelihood that more property owners may not be able to pay their taxes. Readers are reminded that real estate taxes have gone through the roof: From the 500 million euros the state raised in 2010, it expects 2.9 billion euros next year, and about 2.2 billion euros in 2013 via electricity bills.

There is no doubt the government will find itself in a very difficult position politically if asked by the troika to fill the 2-billion-euro fiscal gap. The same may be true of the economy, which will struggle to avoid a seventh consecutive year of recession under the weight of additional fiscal austerity. There is no easy solution and the two sides will have to work out a reasonable plan that takes into account some of the issues mentioned.

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