ECONOMY

No public sector reform would mean no fiscal sustainability, for quite a long time

Greece may manage to attain the budget deficit target it has been set in the economic policy program it agreed to with the European Commission, European Central Bank and International Monetary Fund, for the year 2010 and even 2011 but risks going nowhere if it fails to reform the public sector. And the signs toward this end are not good, at least so far. The government is today to unveil its 2011 draft budget, aiming at a budget deficit well below the 7.6 percent of gross domestic product (GDP) target initially set in the memorandum with the troika of international lenders mentioned above. If the rumors turn out to be true, the deficit target will be set at 7.1-7.2 percent of GDP compared to a deficit equal to 7.8-7.9 percent of GDP in 2010. Again, this is better than the initial goal set at 8.1 percent of GDP despite lagging tax revenues but thanks to a higher nominal GDP on the back of surging inflation and some unorthodox spending cuts. Assuming there is no unpleasant surprise from the European statistics agency Eurostat, such as an upward revision of the 2009 budget deficit figure, estimated at 13.6 percent of GDP, one must admit that the fiscal consolidation has been largely impressive. However, as it is usually the case, numbers often mask reality. Tidying up the central government’s runaway spending in recent years with an average 15 percent pay cut and other cuts in the ministries’ operational expenses is nothing but a facelift for the true wound to Greek economy, that is, the public sector. No wonder a recent poll conducted by one of Greece’s largest and most well-known poll companies two weeks ago showed that the percentage of content employees was roughly equal to those who were unhappy among civil servants. The percentage of discontent exceeded 85 percent among employees in the private sector. It is not difficult to understand why the results of the poll reveal the truth if one speaks to the average worker at a private company. The latter worker supports with his taxes the jobs of many in the civil service who would have been redundant otherwise, while he himself facing uncertainty about his own job, including a sizable wage cut or even unemployment. «It makes a hell of a difference to go from 100 euros to 85 or 80 and know you will have your job for life than going from 100 euros to 0,» a manager in a chemical company put it. With many private companies preparing for more layoffs, this kind of argument, along with more anger, will be heard more often, stoking a conflict of interests between the public sector and private-sector employees. The fact that some of the growing unemployed will be the victims of the state’s policy not to pay its domestic suppliers, such as construction, pharmaceutical companies and others on time, to cut spending artificially in order to meet the official budget deficit target is likely to make them even more upset. This has already been the cause of a lot of headaches for the heads of said companies, who, in turn, fire back in what seems to be a never-ending vicious cycle. Companies are withholding paying value-added tax (VAT) to the state even if they have liquidity because they know the state will not repay what it owes them in VAT refunds, subsidies etc. Of course, the state is not showing any intention of netting these amounts and life goes on with the recession hurting more and more as viable companies seek protection from their creditors under bankruptcy law and others call it quits. At the same time, more and more citizens are discovering that services at public hospitals remain as poor as they once were while the education children receive at public schools does not improve despite an expected increase in registration this year. After fainting and resorting to the health service at night for the first time in his life, a retiree who spent most of his life working in the mining and metals industry found out what many middle-class Greeks already know: The conditions at a major Athenian hospital were so abhorrent that his health would have been in danger if he waited for the busy doctors to look after him. His family decided to take him to a private hospital and pay whatever amount for him to get better care. «You pay your social security contributions and taxes for life and when the moment comes you realize public healthcare is not there. I would have been better off had I evaded taxes or found a way not to pay my social security contributions and used the money instead to buy a good private health insurance policy,» he said. The lesson is clear. If the public sector is not reformed so the average guy is able to see an improvement in his daily life, any effort to restore fiscal sustainability will not last for long. The troika and the government want Greece to achieve fiscal consolidation, boost its competitiveness and economic growth in the years ahead. They may have put all their eggs in the wrong basket as long as the big sick man in the Greek economy, that is, the public sector, is left intact or they introduce the kind of reforms that have been seen for the Hellenic Railways Company (OSE).