New round of spending cuts eyed

The government is expected to move ahead with cuts to state spending as a means of securing its difficult fiscal targets. Every form of deviation recorded on the revenue front means an automatic cut in spending. For example, lower-than-expected revenues of 700 million euros for the first five months of the year have led the Finance Ministry to reduce expenditures in five areas, such as in overtime pay for civil servants, the operating expenses allocated to each ministry and money pumped into state-owned enterprises. Other options where the state can reduce expenditure include the public investment program as well as by not renewing civil servant work contracts that have expired. As a last option, the ministry could bump up revenues by immediately implementing steps planned for 2011 and 2012, such as slapping a new one-off tax on 2009 corporate profits above 100,000 euros. The increase in value-added tax on all product and service groups to the same higher level is also being eyed by the ministry. The idea involves increasing VAT on products such as foodstuffs and medicines to 23 percent from 11 percent, based on tax rates applicable in July. One concern, however, with raising VAT levels is that the increase often weighs on tax revenues while also harming economic activity in the sector. A plan likely to be implemented immediately is the reintroduction of games of chance. A draft bill on the issue is expected to be submitted to lawmakers soon, in a move seen as providing a major boost to revenues. The Finance Ministry also hopes to get a tighter grip on spending by pension funds, hospitals and universities – state organizations that create a financial headache for the government. Steps in this direction include keeping the pace of spending hikes in line with annual expansion rates in gross domestic product. In the event of economic contraction, spending cuts should outpace the negative GDP rate.