Budget backup plan in preparation

The government is working on a backup plan to be introduced in the event state revenues and expenditures are off target in the first two months of the year. According to sources, Brussels has asked the Greek Finance Ministry to take tough steps if the budget deficit shows no sign of easing. Among the ideas the ministry is considering is increasing value-added tax (VAT) by two percentage points (to 21 percent from 19 percent currently), taxing dividends paid in 2009, abolishing the preferential treatment of certain professions, such as pilots and athletes, from this year and upping taxes applicable on properties. It appears almost certain that the government will increase fuel levies. At the same time, state ministries will see their budgets slashed while a billion-euro spending cut for the Education Ministry may also be likely. Data on the course of the budget for 2009 continue to be disappointing with a further drop-off in revenues in October and November possibly pushing the deficit above 12.7 percent of economic output this year. A VAT increase of two percentage points may please Brussels but the positive impact accruing for state finances from such a step is not certain. The previous VAT hike, under ex-Finance Minister Giorgos Alogoskoufis, did not result in significantly higher state revenues but prompted an increase in tax evasion. At a time when the crisis is weighing heavily on markets and there has been a sharp drop in consumption, an increase in VAT could prove to be a bad move for state finances. According to the Finance Ministry’s calculations, a two-percentage-point hike in VAT could result in additional annual revenue of 3 billion euros. On the other hand, abolishing the preferential tax treatment of certain occupations is expected to provide immediate relief to the budget as these groups will be taxed in accordance with regular tax rates.

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