An April Fools economy

The leaders of Greece’s coalition parties are due to meet on Wednesday, a day before the troika returns to Athens to resume its latest inspection of Greek public finances and check on the progress of structural reforms. Reports indicate that among the subjects which will dominate both Wednesday’s talks and subsequent meetings with officials from the European Commission, European Central Bank and International Monetary Fund are the collection of an emergency property tax and installments for unpaid debts to the state.

The talks will take place in the wake of Eurostat figures showing that Greece, for the first time since the crisis began, has the highest unemployment rate (26.4 percent) in the euro area. At the same time, Greece’s leading economic think-tank, IOBE, warned that the current rate of unemployment in this country is unsustainable and that 60 percent of jobless people had been without work for at least 12 months. Also this week, Markit’s PMI showed that manufacturing in Greece, which accounts for almost 15 percent of the economy, continued to fall in March as it has done since September 2009. Meanwhile, the Finance Ministry has reportedly revised this year’s recession figure to 5 percent of GDP from 4.5 percent.

To say that the talks between Greece and the troika will have a touch of the surreal about them given the mauling that the real economy is suffering is probably an understatement.

The emergency property tax was introduced in late 2011 as a temporary measure designed to fill a large fiscal gap and appease an increasingly exasperated troika. PASOK leader Evangelos Venizelos was finance minister at the time and his announcement of the tax, levied via electricity bills, left him with a political stigma that is unlikely to rub off before his political career ends. It was the moment when the PASOK government lost the tacit support of much of the middle class, which hoped the austerity measures were a price worth paying for the reforms that came with them. Pounded by two years of wage cuts and tax hikes, many lost their faith in the government and the consolidation program.

An argument could be made that the tax is more progressive than a lot of the other measures adopted by the government since it is calculated based on the size of each property. But the decision to levy it via electricity bills and the threat that those who did not pay would have their power cut off defined it as socially unjust. The threat of power cuts in cases of nonpayment was later withdrawn but the damage was already done and the government is now involved in a legal battle over whether electricity bills should be used at all to collect taxes.

The government’s plan was to incorporate the emergency levy with other property taxes this year but the collection mechanism has not been deemed reliable enough yet to take on this task and ensure the revenues roll in. The emergency tax brings in about 1.7 billion euros a year and the troika has made it clear that unless this revenue can be reliably secured from elsewhere, the levy will have to remain in place.

There seems to be some logic in the lenders’ request until one takes into account the fact that 1.3 million Public Power Corporation customers (firms and individuals) have not paid their electricity bills. At the end of 2011, PPC had arranged payment plans with 400,000 of its customers. This figure has now almost doubled. About 30,000 customers a month are having their power cut off – not because of the property tax but because they cannot pay for the electricity itself.

This suggests that finding the best method to collect the emergency property tax is the least of the problems facing the government and its lenders. Finding Greeks who are still able to pay it is likely to prove a much bigger challenge.

It’s a similar case when it comes to one of the other issues on the agenda for talks this week: deciding on how many installments to allow for individuals and businesses to pay off their debts to the state. Over the last few weeks, Greece and the troika have reportedly been at odds over how many installments taxpayers should be allowed. The government favors a maximum of 48 monthly tranches in order to lighten the load as much as possible but Greece’s lenders don’t think this is viable and prefer 36.

The argument, though, seems to be academic when one looks at the reality of what is happening with overdue taxes. In the first two months of this year, the amount owed to the state increased by 1.3 billion euros to a total of 56.6 billion. During January and February, just 488 million euros was collected from expired debts. It is clear that in an economy that has been shrinking rapidly since late 2008, the stark reality is that the amount of money owed to the state is increasing and no matter how much the government tinkers with payment plans, the 2.5 million individuals and 150,000 firms that owe taxes are not magically going to possess the ability to pay off their debts.

Of course, every effort should be made to improve the collection mechanism and ensure that those who can pay are not allowed to hide behind the wider problems in the economy. However, to expect to squeeze fiscal blood from Greece’s petrified economy seems ludicrous. The declining VAT revenues at the beginning of this year are further proof of this impossibility.

Yet, despite all this, the next few days will be taken up by discussions about how to levy the emergency property tax and how many installments to offer taxpayers for debts to the state. Surging unemployment, declining manufacturing and the deepening recession are unlikely to feature on the agenda. Perhaps this shouldn’t bewilder us anymore; the only real surprise is that the talks weren’t scheduled for April 1.

[Kathimerini English Edition]

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