Only cutting expenses will do the trick

The impact of last week’s indirect tax hikes on prices has not yet manifested itself, but it will be felt sooner or later. Further, there is no indication that the desired effect of boosting public revenue will be achieved. At any rate, higher tax rates make tax evasion more attractive. The effects of the higher taxes on inflation are another crucial concern. One of the key reasons for the Greek economy’s low competitiveness is that core inflation (which does not take into account the volatile prices of fruit, vegetables and oil) remains well above the eurozone average. This is the «real» inflation, which makes Greek goods and services more expensive. The latest quarterly report by the Foundation for Economic and Industrial Research (IOBE) lists the following as the main factors of Greece’s chronically high core inflation: inefficient functioning and non-competitive conditions in a number of oligopolistic markets; steeply rising labor costs, mainly in the public sector; and excess private demand. None of these sources of inflation is tackled by increasing consumption taxes. If the expected higher revenues are not realized, the problem will be more serious. The real hope for reducing the public deficit lies in cutting expenses. However, this is not an easy solution and implies bold reforms throughout the public sector, state organizations and local government. And cutting public consumption has to be accompanied by real privatization. The government needs not only to restrict new hirings but to open the labor market to flexible forms of employment. It is necessary, beyond the dialogue on tertiary education, to allow the education field a substantial opening to the private sector. The Greek economy today offers neither satisfactory returns nor moral satisfaction sufficient to attract resources that can help improve education and health services. It is highly unlikely that the country can attract large foreign investment projects, much less sums for development aid.