Low-tax Irish model better suited to Greece’s needs

Greece should follow the low-tax, low-state-expenditure Irish model rather than the tax-and-spend Scandinavian one, Economy and Finance Minister Giorgos Alogoskoufis asserted yesterday, continuing the debate over which model is more suitable to the Greek economy’s needs. Speaking at a meeting jointly organized by the United Nations Regional Information Center (UNRIC) and the Foundation for Economic and Industrial Research (IOBE), Alogoskoufis said that there are several models from which Greece could learn. The Scandinavian model is one of very high state spending and is based on an effective state and local administration, social and political consensus but also on very high taxation. VAT in Denmark and Sweden is 25 percent and the top income tax rate exceeds 50 percent in both countries and 60 percent in one of them. The Irish model is more appropriate to Greece’s needs, Alogoskoufis said. It is based on low tax rates for both individuals and corporations, low indirect taxation and restrained public spending. Since the mid-1980s, Ireland has drastically transformed its economy, attracting foreign investment, sustaining the highest growth rates in the European Union for almost 20 years and turning from a country in need of massive EU aid into one of the richest EU countries in per capita GDP, Alogoskoufis said. His last point is not quite correct: The presence of numerous foreign companies in Ireland means that they repatriate most of their profits, resulting in an anomaly: Ireland’s GDP (gross domestic product) is about 15 percent higher than its GNP (gross national product), while in Greece’s case, for example, GNP is slightly higher than GDP. If we account for this difference, Ireland’s per capita income is slightly above the average of the «old» 15 EU members (that is, excluding the 10 newcomers, mostly from Eastern Europe). Still, the increase in Ireland’s incomes has been impressive, thanks also to an agreement with unions that has kept their demands under wraps and heavy investment in education. Alogoskoufis also analyzed aspects of the government’s economic policies. He denied that he will postpone reforms in public utilities, affirming that he will push ahead with offering better services to the public and better value for money, given the fact that a lot of taxpayer money is spent on state-owned utilities. Alogoskoufis repeated his position that tax reform is at the center of his economic policy. He said that he first cut corporate taxes in order to sustain the economy’s growth momentum following the 2004 Athens Olympics, adding that personal income tax reform will follow starting in 2007. Other policy priorities include cutting public spending and deficits, he said. Referring to the labor market, Alogoskoufis said that its problem is not restrictions in layoffs but the fact that there are essentially two markets: the excessively protected public sector and the adequately protected private sector. These two systems must converge. Alogoskoufis also said that the country needs a wider consensus on reforms and mentioned the coming dialogue over social security as the perfect opportunity to forge such a consensus. Finally, Alogoskoufis declared himself more optimistic about global economic prospects than the annual United Nations report on the economy which was presented at yesterday’s event. The report emphasizes the threats to global economic recovery posed by continuing high fuel prices, a possible bird flu pandemic and a likely sudden drop in property prices.

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