Tax dodgers may hold key to propping up demand, economy

The Greek government has decided to be reactive rather than proactive in its efforts to trim the budget deficit to the targeted 3.7 percent of gross domestic product (GDP), hoping it will not put an unnecessary burden on the economy. In doing so, it risks the economy remaining weak next year when the global economy is projected to recover. Since there seems to be no mood for taking the risk of being proactive and taking a comprehensive set of fiscal and other measures to ensure a sustainable reduction in the budget deficit in the years ahead, the government may have to think about something else. It may be shameful but this could be to complement its reactive fiscal policy approach by using «black money,» that is money generated in the underground economy, to boost a key sector, namely construction and real estate. Finance Minister Yiannis Papathanassiou announced last week the long-awaited tax measures to curtail the budget deficit but he admitted there is still a shortfall estimated at around 400 million euros that must be made up before the 3.7 percent of GDP target can be attained this year. According to the minister, the government will not hesitate to take all necessary measures to meet the budget deficit target, ignoring the political cost. There is no doubt that a comprehensive set of measures for reducing the public debt to 80 percent of GDP or lower should involve the restructuring of the public sector, including the abolition of the right of lifetime employment, at least for all new public servants. To do so, a government needs a powerful political mandate and a multi-year commitment to the broad restructuring of the public sector with strong leadership backed by teams of experts. It is safe to say that neither of the two major political parties has the stomach for such a radical restructuring of the public sector. Therefore, the other two options left are either to limit the pay raises of public servants and reduce hirings or to broaden the tax base and increase tax rates. The government almost exhausted the measures to contain public expenditure by freezing salaries and pensions for public servants this year and granting a lump-sum benefit to lower earners. The next step was to start raising taxes, targeting high-income individuals, fuel, mobile phones and other excise taxes. With the economy stagnating, even these measures are not enough to reduce the budget gap to the targeted 3.7 percent of GDP. There is little doubt the government will come up with another set of tax-raising measures in the fall. There is also no doubt all these measures hurt consumer spending, the main driver of GDP growth. Given this policy, the government may have to put to work some of the money in the underground economy, that is, to boost GDP growth. According to senior bankers, deposits at banks are growing at a satisfactory single-digit rate, at a time interest rates on time deposits and savings are heading south. This is due partly to consumers cutting spending and partly to money flowing in from non-reported activities. One way to use money in the underground economy is to allow purchases of real estate, especially houses, up to a maximum amount for a period of two or three years without the requirement of «pothen esches,» that is, proof from the buyers regarding where they found the money. It is known most of the money generated in the underground economy looks for alternatives to stocks, government bonds and other investments, where no «pothen esches» is required. The waiver of this source of wealth requirement in 1992-1993 by then Finance Minister Stefanos Manos turned out to be decisive for the subsequent recovery of demand for new housing and building activity, according to owners of construction companies. Of course, the latter are stuck with thousands of unsold new apartments and houses and therefore it is in their best interest to take measures to bolster demand. However, the same is true for the small firms that supply construction materials and the tens of thousands who are employed in this and related sectors. Since the government cannot afford more generous measures to bolster demand for new homes, the idea of mobilizing some of the «black money» to boost the most battered sectors of the economy may not be such a bad idea. Of course, it is shameful for a government to admit it needs the help of tax dodgers to prop up the economy at the same time it is asking law-abiding citizens to pay more to close the budget gap. However, the government cannot adopt a reactive policy and still hope to honor its fiscal commitment to the EU without hurting economic activity further, unless it devises ways, albeit unorthodox, to heal wounds in sectors that are dragging down the economy.