Gov’t 08 targets look uncertain

The crisis in the international financial system, high interest rates and oil prices and geopolitical instability are creating a somewhat hostile environment for the government’s economic policy in 2008, in contrast with the previous two years. The top policy target, which depends heavily on the international environment, is the implementation of the budget, particularly the increase of revenues by -6.2 billion, or 12.9 percent. The big question is whether this target can be attained without an increase in value-added tax (VAT), which now stands at 19 percent. This is considered feasible, on two conditions. First, the attainment of a 4 percent growth rate, which alone would account for about -4 billion in extra revenues. The European Commission and other international organizations have said a 4 percent growth rate is too optimistic. Tax collection Second, that the unwieldy and often corrupt tax collection mechanism achieves a spectacular improvement in efficiency. The budget envisages additional revenues of -2.2 billion from direct taxes and 4 billion from indirect taxes. The government hopes that of the latter amount -2.36 billion will come from the fight against VAT evasion. The equalization of heating and vehicle fuel taxes is projected to yield an extra -1.29 billion and the single property tax a further -660 million. The second most important target is nudging inflation down from last year’s estimated 2.9 percent. This has been factored into the budget on the assumptions of an average oil price of $78.7 per barrel and a fall in cereal prices. But neither of these assumptions is likely to be confirmed. Oil has remained steadily above $90 a barrel in the last two months and inflation in December was estimated to be around November’s 3.9 percent. Moreover, the omens are not at all favorable for January, as the index will be burdened by price increases of about 15 percent, announced by about 100 companies on 200 products. Meanwhile, inflationary pressures are necessitating – but at at the same time making more difficult – the attainment of the third challenge faced by the government, namely containing wage rises. Giving in to demands for high wages entails the risk of consolidating the inflationary pressures in the economy. In order to avert such an unfavorable development, the government plans to keep pay increases for public servants to just above the projected inflation rate, at 3 percent. It will also seek two- or three-year collective wage agreements with moderate increases for employees in public enterprises and urge self-restraint in the private sector’s collective wage agreements, which are also hoped to be of two or three years’ duration.