Gov’t dilemma: Pension cuts or tax increases?

Gov’t dilemma: Pension cuts or tax increases?

The government is striving to find measures that will raise the 900 million euros, or 0.5 percent of gross domestic product, needed to plug the remainder of the fiscal gap for the 2017-18 period and pave the way for the Eurogroup meeting in April 22 to reach decisions on the future of Greece’s bailout program.

The Finance Ministry and the country’s creditors are seeking a solution mainly through indirect taxation and increasing existing taxes. However, this is proving to be quite difficult, leading to thoughts in favor of finding the necessary resources through income tax.

Sources say that the creditors are demanding measures that will have an immediate impact and make sure that the primary surplus targets will be met. In this context, they believe that pensions hold the potential for savings as some cuts there could make the fiscal numbers add up.

On the other hand, if faced with the dilemma of having to choose between cutting pensions and increasing direct taxation, the government would likely opt for the latter, while very little effort is being made on the expenditure front. Alternate Finance Minister Giorgos Houliarakis is trying to promote the idea of re-examining public spending, with assistance from British Treasury experts, but it appears that for now his cabinet colleagues are not interested.

Given the government’s reluctance to cut spending, the creditors’ representatives have accepted that a large part of the fiscal adjustment will derive from the revenues side. This is despite the fact that tax hikes have a greater impact on growth than expenditure containment, resulting in the need for more measures in terms of volume for the necessary fiscal result to be attained.

In any case, the government will have to have a set of measures totaling 3 percent of the GDP or about 5.4 billion euros ready for the April 22 Eurogroup if it wishes to avoid being blamed for blocking the negotiations with the creditors.

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