Failure on reform front leads to new discontent
Public finances have long been one of the weak points of the Greek economy. So it is no surprise that the issue has again come to the fore as economic activity slows down on the heels of the global credit crisis. What does surprise is that the Greek government has not learned its lesson. It is not the first time and will not be the last. A Greek government is under pressure to increase taxes to help contain the budget deficit and avoid coming under the scrutiny of the European Commission because it cannot control expenditure growth. In a replay of a drama seen many times in the past with different protagonists, the conservative government of Premier Costas Karamanlis finds itself under criticism from the opposition, trade unions, craftsmen and others for raising taxes on dividends, capital gains, car registration and professionals. Even worse, it undermined its own credibility by extending favorable terms to tax evaders to settle their outstanding debts. Of course, no critic bothered to ask why it let primary spending exceed the budget target by a wide margin, necessitating an increase in tax revenues to keep the budget deficit below the threshold 3 percent of GDP. This is normal in a country where the vast majority of the population thinks there can be a free lunch with the state increasing expenditures without raising taxes. The notion of current deficit spending representing a future tax liability for which households will have to account in the form of higher savings is almost unknown. It is not popular among university professors and it is not popular in the local press. For some cynics, it is payback time because the conservatives used to criticize their socialist predecessors when the latter were taking unpopular measures necessary for the Greek economy and even demanded more state payouts than the latter gave to different groups to win over more votes. Of course, things would have been much better if the conservatives had applied two simple principles. First, take all the unpopular economic measures early in the first or second term. Second, try to link budget expenditures to tax revenues as much as possible by reforming the way the budget is formulated and implemented. The first action is a political decision taken by the prime minister after consulting his ministers and economic advisors. It is known that the conservative New Democracy party opted for a gradualist approach to tackling the country’s economic problems. This decision may have been influenced by the harsh treatment meted out by voters to the previous conservative government in the early 1990s which attempted to take the so-called «cold turkey» approach. However, the conservatives did not change course even after winning last year’s general election. Apart from some social security reforms for private sector employees, the government did not really push hard for tougher measures. So, the repercussions of the global credit crisis found it without a cushion to weather the adverse effects of slower economic growth. Still, the Greek economy is an oasis in the eurozone in terms of GDP growth, even though somebody arriving from abroad and reading the local press may have concluded the country is facing a recession. Of course, this argument raises concerns about the future of Greek public finances if the economy slows down further, given its high debt-to-GDP ratio and its aging population pointing to greater pension and health expenditures down the road. In addition to the highly political decision of implementing a gradualist economic policy or taking the «cold turkey» approach, the conservative government did not fundamentally change the way the Greek budget is formulated and then implemented. This is a technocratic issue and requires a lot of work from dedicated individuals because it involves changing not only processes and the culture of state bureaucracy involved in drafting the budget, but the adoption of new technology as well. Although it took some timid measures toward reforming the budget process and made an announcement about fundamental reforms, the conservative government has thus far failed to implement anything. So, the decoupling of budget expenditures and tax revenues continues and the only way to make up for the shortfall is the emergency tax measures announced recently. All-in-all, the conservative government is facing public discontent even though some of its tax measures make sense in terms of equity and closing the budget gap, simply because it failed to learn its lesson: First, to move fast and take the unpopular measures early in its term and second to plan and implement as soon as possible the reform of the Greek budget in a bid to make expenditures more sensitive to changes in tax revenues and not the other way around.
