Troika review begins with fiscal targets and tax breaks
The Troika of international lenders began its latest review of the Greek programme on Tuesday, just six days before the 2015 draft budget is due to be submitted to Parliament. The focus is on what fiscal targets the government will have and what tax breaks it will be able to offer.
Citing a senior Ministry of Finance (MoF) official, To Vima daily reported that the general government (gg) primary surplus is expected to reach 1.7% of GDP in 2014. This is lower than the 2.3% incorporated in the latest Medium-Term Fiscal Strategy (MTFS) 2015-18, but is still above the Economic Adjustment Programme (EAP) target of 1.5%.
The ministry is reportedly going to set its estimate for 2015 at 2.3-2.5% of GDP, broadly in line with the MTFS target of 2.5%, but below the EAP target of 3%.
However, Eurozone officials have recently stressed that Greece should stick to the agreed fiscal targets for 2015 since any potential relaxation would signal to the markets that Greece is beginning to slack as it approaches the end of the EAP.
A key issue for 2015 is the fiscal gap, which was estimated at EUR 2.02 bln (1.1% of GDP) by the IMF in its fifth review report on June 10. Since then, several developments have altered the initial numbers and will require to be examined by Athens and its lenders.
Apart from the updated estimates on income tax and single property tax (ENFIA) revenues, these developments mainly involve the impact from:
a) Retrospective reversing of the 10% wage cut on armed forces and emergency services that emerged from the Council of State ruling;
c) Retaining the solidarity tax for at least one more year albeit with lower rates, according to the government’s plan;
d) The recently announced 30% cut in the excise tax on heating oil;
e) Retaining the VAT rate on food and accommodation services at the lower rate of 13% for another year.
Furthermore, the MoF will reportedly highlight the budget outperformance so far this year and the absorption of EU structural funds in an effort to convince the troika representatives to allow Greece some “breathing space,” as Finance Minister Gikas Hardouvelis called it.
Citing MoF sources, Kathimerini set out the government’s plan for tax breaks in 201516. For the next year, the ministry aims at reducing the tax rate on enterprises and sole proprietors from 26 to 20%, trimming the solidarity levy by 30% and retaining the VAT rate for food and accommodation services at 13%.
Kathimerini also noted that tax interventions for 2016 include a further drop in the corporate tax rate (from 20 to 15%) and the solidarity levy as well as a cut in the tax rates for physical persons with the target set at 10%age points reduction over time.
To Vima presented a different plan, which involved a cut in the corporate and the upperscale of personal income tax rate by 2 percentage points that will be incorporated in the final 2015 budget, which will be tabled in Parliament in December. Both rate cuts will be applied in each of the next five years, aiming at reducing the corporate tax rate from 26 to 15% and the upper rate for individuals from 42 to 32% after five years.
The government also plans to significantly increase the number of instalments for unpaid taxes and social security contributions (SSC) from 12 up to 100 and at the same time halve the interest rate from its current level of 8.76%. According to Kathimerini, this arrangement would involve 1.8 mln tax and 400,000 SSC debtors.
Most of the proposed tax reliefs were announced by Prime Minister Antonis Samaras in his speech at the Thessaloniki International Fair on September 6.
The Finance Ministry is also considering adjusting downward objective real estate property prices (used for tax purposes) by 1520% by the end of 2015, instead of 2017 as initially planned, according to To Vima. Such a development would balance the property market since in many cases objective prices stand above market prices, while it would also indirectly lower the ENFIA burden.
None of the government’s plans for tax relief have yet been agreed with the Troika. It is unclear whether such an agreement could be reached before the tabling of 2015 draft budget on October 6. Last year’s budget was voted in December without the approval of the international lenders.
The agenda for the upcoming
also includes two issues (set by the Troika) related to changes in the social insurance system and the labour framework. Members of the government have said publicly that lower pensions, collective dismissals in the private sector and changes in union laws are not politically feasible.
The Troika is reportedly insisting on a new wage structure in the public sector with an introductory wage at 586 euros (similar to the minimum wage in the private sector), settlement of non-performing loans and abolition of the primary residence’s protection from foreclosure as of the beginning of 2015. The implementation of close to 1,000 prior actions mainly related to structural reforms and technical issues is also reported to be part of the Troika review.
This round of discussions with the troika is expected to last for almost two weeks, with a break for the IMF Annual Meeting (due on October 10-12) and Eurogroup (on October 13). The next two important dates for October relate to the EU Summit (on October 23) and the announcement of ECB-EBA stress tests results (on October 26).