ECONOMY

Chronic problems are still at large and menacing

The newly sworn-in Greek government has to show results soon or it is bound to earn discontent. It became clear at last week’s first Cabinet meeting – a whole 20 days after the election – that all the big issues – what to do with Olympic Airlines, waste in local government, hospital debts and public utility deficits – remain open and menacing. All these unsolved problems, all the weaknesses of the state, the economy and society, are encapsulated in the impasses of the budget. The Cabinet did not discuss the recent comment by European Union Economic and Monetary Affairs Commissioner Joaquin Almunia that the 2008 budget is ambitious and uncertain to meet success, particularly as regards its revenue targets. However, all the ministers who spoke agreed that if the pledged reforms are not put on a fast track to realization, public finances are bound to reach a stalemate and sooner or later the government will have to introduce new taxes that will burden the lowest incomes, such as an increase in value-added tax. Sure, the prime minister, Costas Karamanlis, and his economy minister, Giorgos Alogoskoufis, have said many times that «it is not in the government’s intentions to increase VAT rates» but this is no guarantee that that will not happen. If, for instance, it becomes evident around the middle of 2008 that revenues are falling short of the additional 6 billion targeted in the draft budget and that, therefore, the target of bringing the public deficit down to 1.7 percent of gross domestic product (GDP) – from a projected 2.5 percent this year – is unattainable, Brussels is bound to reprimand Athens that it is violating the Stability Pact which envisages balanced budgets by 2010 and will demand additional measures. It is well known that for the European Commission, the most reliable measure for raising revenue is a VAT hike. Almunia last week congratulated the German government for raising VAT by three percentage points and succeeding in balancing its budget this year, but also the Netherlands which, despite an already balanced budget, is planning another VAT hike. Contrast The prime minister noted that whereas the Greek private economy is doing well and firms are flourishing, public finances cannot seem to get out of the vicious circle of high public debt and deficits. This growing gap between the public and private sectors, he said, shows the urgency of the need to pursue reforms that will tidy up public finances and improve public administration and the educational system. Karamanlis asked Alogoskoufis to expedite the tabling in Parliament of the bills on fighting tax evasion, the equalization of taxes on heating and automotive diesel and on property taxation. He also admonished ministers to adopt immediate measures for containing the expenses of public enterprises, local government and hospitals in particular. It is obvious, however, that such important measures require serious reforms which have not been planned yet. For instance, Health Minister Dimitris Avramopoulos has pushed through a law for central control of the procurement of medicines by public hospitals, but the success of the law depends on in-depth changes in the way hospitals are managed and public money is spent. The same problem also exists in local government, where the scandalous waste of state subsidies has given rise to corruption that cuts across party lines. Finally, the law on the frugal management of public utilities and enterprises (mainly under the responsibility of the ministries of transport, defense and development) has fallen into abeyance because ministers have been wary of clashing with organized unions. As a result, deficits have been swelling instead of falling. Besides local government and hospitals, the public enterprises and organizations, including Olympic Airlines, Hellenic Railways and social security funds, are indeed the big drains on the budget and are not going to close if the government does not dare clash with those in the cushy and privileged posts. Budget revenue goal may require new VAT tax hike The Greek government has declined to say whether it will raise value-added tax (VAT) again next year but economists said yesterday the budget revenue target was too ambitious to meet without a hike. Having been removed from the EU’s list of budgetary offenders this summer after bringing its deficit to below the EU’s 3 percent ceiling, Greece has forecast revenues of -55.3 billion for 2008, an 11.6 percent increase from this year. «If there is significant divergence from budget targets in the first months of 2008, the government is very likely to raise the VAT tax by one or two percentage points,» said an economist at a Greek bank who declined to be named. The government has skirted around the issue, without clearly denying a VAT tax was in its plans. The Finance Ministry declined to comment yesterday. During its first term, the conservative government raised VAT by one point to 19 percent to shore up the budget. Although Finance Minister Giorgos Alogoskoufis said about a month ago a new hike is not in his plans, many say it is a question of when and not if. «The government does not want to rule out the possibility of a rise in VAT tax, one of the measures in its arsenal to meet budget goals, as are cuts in the public investment program and defense spending,» said economist Ilias Lekkos at Piraeus Bank. Greece, targeting a balanced budget by 2010, wants to cut the deficit to 1.7 percent of gross domestic product (GDP) next year from 2.5 percent in 2007. It will rely on a -6 billion increase in ordinary budget revenues next year. About -2.2 billion will come from new taxes on real estate and heating oil. But economists doubt the government can achieve the target without an increase in VAT. The new tax on heating oil may prove difficult to collect as the scheme is seen as bureaucratically cumbersome. The tax increase on heating oil will seek to reclaim revenues from fuel smuggling. Consumers will pay a higher bill when they purchase fuel but will get the tax increase back from tax offices. Details have yet to be spelled out. «There is a high risk that the revenue growth target may be missed. The tax collection mechanism has not been tested on a complicated (fuel) tax to see if it can make the grade,» Lekkos said. Falling behind this year’s revenue target so far has also cast doubt on whether the center-right government can meet next year’s goal. So far, the fight against tax evasion has not yielded the expected results and elections in September caused VAT tax collection efforts to loosen. As a result, ordinary budget revenues – direct and indirect taxes plus EU transfers – grew only 3.8 percent in the first seven months of the year versus a 6.2 percent full-year target. (Reuters)