ANALYSIS

Fears of extended recession in 2016

fears-of-extended-recession-in-2016

This year was supposed to be the year that Greece would exit or at least prepare to exit years of austerity, but it turned out to be the opposite. The country came close to exiting the euro last summer and accepted a new, three-year bailout program. Many wonder whether 2016 will mark a new beginning or be just another year of crisis. The answer should be conditional, but relying on taxes and increased social security contributions to tackle fiscal and other problems is not a good omen.

According to government officials, 2016 will herald the beginning of a new, good era for Greece and its people, paving the way for an exit from the new MoU. Debt relief, following the completion of the first review of the program and perhaps the second review, will provide a boost to market sentiment. So they believe the economy will turn around in the second half of the year and the country will enter a virtuous cycle, meeting the budget targets and fostering stronger growth rates in coming years.

Pessimists see things differently. They think the economy will remain in recession and the fiscal target will not be met, entailing new austerity measures. They also see the administration paying lip service to structural reforms even if it passes relevant legislation in Parliament. Furthermore, they see inexperienced or/and incompetent people with links to the ruling party appointed to important posts in ministries and the greater public sector, which makes them doubt a positive outcome.

We believe some of the arguments of both sides deserve some merit. As far as the government is concerned, there is a realistic chance that the economy will grow again next year if investment spending picks up on the back of privatizations, the relaxation of capital controls and easier bank financing. Improved sentiment could help, provided the first review is concluded and debt relief talks start. Early signs from the tourism industry are also very encouraging and this gives more credence to the argument for a return to growth at some point in the second half of the year despite an expected mild drop in consumption. In any case, we are talking about slight positive GDP growth for the whole year.

In addition, we think the chances of meeting next year’s primary budget surplus at 0.5 percent of GDP are greater than not meeting them. This is because we think the state will be able to cover any revenue shortfall from one-off revenues from combating tax evasion. It may also be able to collect more taxes from value-added tax since people will have to make payments via debit and credit cards and bank transfers up to some percentage of their income to be eligible for income tax deductions.

On the other hand, one must take seriously the charges that executives with party links appointed to important posts lack the competence to carry out their duties. Even worse, one should also take notice of the government’s ideological fixation to deal with fiscal and other problems by raising taxes and social security contributions instead of reducing expenditure. This is the case even where it is clear that unjust practices continue to prevail, favoring small minorities at the expense of the majority.

The examples of some social security funds are eye-popping. The budget subsidizes the social security fund of the employees of state-controlled Public Power Corporation (PPC) to the tune of about 580 million euros annually. This corresponds to a per capital subsidy of about 16,000 euros annually for its 37,000 pensioners.

Moreover, the subsidy to TAP-OTE, the OTE telecommunications company’s pension fund, now controlled by Deutsche Telekom, from the budget amounts to 535 million euros. It concerns 46,000 pensioners, some in their 50s, with the per capita subsidy calculated at around 11,000-12,000 euros. Among those pensioners are some women who have been getting a pension after working for only 15 years at OTE.

On the other hand, the budget subsidizes the IKA fund, the country’s largest, with 3.2 billion euros, which amounts to less than 3,000 euros per pensioner.

One can easily see that halving the annual subsidies to the pension funds of PPC and OTE could produce annual savings of 500 million euros or more. This amount could be used to either preserve the small allowance (EKAS) given to low-income pensioners, which is bound to be phased out in the next few years based on the new MoU, or reduce the size of cuts in main pensions. Greece will have to produce social security savings equal to 1.8 billion euros in 2016 and more by 2018. The state increased health contributions for main and supplementary pensions to 2 and 6 percent respectively in the fall.

Undoubtedly, the lenders’ and successive governments’ efforts to raise Greek state revenues as a percentage of GDP to the average EU and eurozone levels have been successful. However, the cost to the economy has also been quite large since it has lost 25 percent or more of its output since 2008-09. According to European Commission figures, Greece’s general government revenues stood at 46.4 percent of GDP, that is, higher than the EU average of 45.2 percent and close to the eurozone average of 46.8 percent.

This year was the year that Greece was going to leave behind several years of austerity and look to the future with confidence. It turned out to be a tumultuous year, characterized by political uncertainty, with the country coming close to exiting the eurozone. The new year could be better for the economy but insistence on tax and social security hikes to deal with economic problems may lead to worse outcomes.

[Kathimerini English Edition]