Greece agrees to defense cuts to convince troika about lower VAT at restaurants

Greece is to cut 100 million euros from its defense budget in order to reduced value added tax at restaurants and bars from August 1 in the hope of providing its struggling economy with a boost.

Prime Minister Antonis Samaras announced the VAT reduction in a rare televised address on Wednesday and accentuated the positives that could be taken from the first notable tax reduction since Greece’s bailout began in 2010.

“For the first time, not only are we averting something unwelcome, we are implementing some positive changes,” he said

Samaras stressed that the reduction, which will be in place until the end of the year, will only be made permanent if it is deemed a success by the troika. For this to happen, he said, restaurateurs and bar owners would have to pass on their savings to their customers and make a better job of declaring their revenues.

“If we are able to continue meeting our fiscal targets, as we have been doing over the last year, reductions on other burdensome taxes will follow,” pledged the prime minister.

Deputy Prime Minister Evangelos Venizelos suggested the agreement with the troika over the VAT cut, which was only agreed early Wednesday after hours of talks, was a sign that “our partners have begun listening to us.” He also said that the deal had been reached as a result of the government’s “coordinated effort.”

Kathimerini understands that the troika only agreed to the VAT reduction in the food services sector after the government agreed to cut 100 million euros from the Defense Ministry’s arms procurement program. Athens and the troika disagreed about what kind of hole the change in VAT would leave in public revenues. Greece’s lenders thought it would be closer to 130 million euros but eventually gave ground.

The government believes that the reduction will help boost the confidence of consumers and businesses active in the sector and will lead to an immediate rise in consumer activity. It is estimated that some 10,000 businesses in the sector have closed since the VAT rate was increased in June 2011, leading to 30,000 job losses, although this period has also seen Greece’s economy contract drastically.

It also feels that the reduction makes Greece’s food services and tourism sector more attractive to visitors and more competitive against other countries. The troika remains skeptical and has asked the government to provide a monthly update on the impact of the measure.

It was not all plain sailing for Samaras on Wednesday as a slip-up during the pre-recording of his address led to the wrong version, including footage of the prime minister swearing at himself for stumbling over a word, being aired on TV. Sources close to the prime minister said he saw the funny side of the matter.

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