Troika re­view be­gins with fis­cal tar­gets and tax breaks

Financial Mirror (Cyprus) - - FRONT PAGE -

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

talks

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).

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