Pri­vate sec­tor forced to bail out state

Fo­cus re­mains on rev­enues from tax­a­tion while gov’t ex­pen­di­ture has not shrunk to the lev­els re­quired

Kathimerini English - - Front Page - BY DIM­ITRIS KONTOGIANNIS

ANAL­Y­SIS The eco­nomic ad­just­ment pro­gram ap­pears to be back on track, but in re­al­ity it is se­ri­ously threat­ened by the pro­tracted re­ces­sion and the in­abil­ity and un­will­ing­ness of the po­lit­i­cal elite to over­haul the pub­lic sec­tor.

In con­trast to pop­u­lar be­lief both in Greece and abroad, the gen­eral government spent a bit more as a per­cent­age of gross domestic prod­uct in 2012 than it did in 2009, the year be­fore Athens asked for a bailout from the eu­ro­zone and In­ter­na­tional Mon­e­tary Fund, ac­cord­ing to Euro­pean Com­mis­sion data. By com­mit­ting to meet the bud­get deficit tar­gets with­out suf­fi­ciently cut­ting pub­lic ex­pen­di­ture, the au­thor­i­ties fo­cus on rev­enues, flirt­ing with tax­ing the mid­dle class into obliv­ion.

The pop­u­lar myth, which has been ac­tively pro­moted by lo­cal politi­cians, who have lit­tle or no in­ter­est what­so­ever in re­struc­tur­ing the huge pub­lic sec­tor, would have it that a short­fall in rev­enues is mainly re­spon­si­ble for the Greek fis­cal mess. The politi­cians’ stance is eas­ily ex­plained by their un­will­ing­ness to suf­fi­ciently cut spend­ing, which would have meant do­ing away with numer­ous or­ga­ni­za­tions and coun­cils that pro­vide jobs and perks to their vot­ers and party faith­ful. This is more preva­lent in the cen­ter-left par­ties, but even the con­ser­va­tive New Democ­racy party ex­celled in this met­ric last time it was in power.

One would have ex­pected the fig­ures to back up the lo­cal politi­cians’ and some an­a­lysts’ claim that the bud­get hole is mainly the re­sult of in­suf­fi­cient rev­enues. How­ever, num­bers do not lie. A look at the Euro­pean Com­mis­sion’s AMECO data­base on gen­eral government, last up­dated on Fe­bru­ary 22, shows to­tal rev­enues went up to 43.8 per­cent of GDP last year from 38.3 per­cent in 2009. This is an in­crease of five per­cent­age points of GDP in rev­enues de­spite the con­tin­u­ing con­trac­tion of the econ­omy over the same pe­riod.

How­ever, what is really amaz­ing is some­thing else: The gen­eral government’s to­tal ex­pen­di­ture reached 54.1 per­cent of GDP in 2012 com­pared to 54 per­cent in 2009, the high­est ever pre­vi­ously recorded. To be fair, one should note that to­tal ex­pen­di­ture is pro­jected to fall to 51.8 per­cent of GDP this year, but even so it is still too high for a coun­try which came close to bank­ruptcy be­cause of its huge pub­lic debt.

Even if one ex­cludes in­ter­est pay­ments on pub­lic debt and fo­cuses on the so-called pri­mary spend­ing, the con­clu­sion does not change. Pri­mary ex­pen­di­ture reached 49 per­cent of GDP in 2012 com­pared to 48.8 per­cent in 2009, ac­cord­ing to the same data­base. This is de­spite a sharp drop in pub­lic in­vest­ment spend­ing both in nom­i­nal terms and as a per­cent­age of GDP. In other words, the de­crease in gen­eral government spend­ing in nom­i­nal terms lagged be­hind the drop in GDP over the same pe­riod, tak­ing the spend­ingto-GDP ra­tio to new record highs in 2012.

This con­firms that fis­cal poli­cies have pe­nal­ize the pri­vate sec­tord more than the pub­lic sec­tor, which is the main cul­prit for the coun­try’s debt cri­sis. This in turn may ex­plain more con­vinc­ingly why the econ­omy has been mired in re­ces­sion for such a long time. By chan­nel­ing more and more funds from the pri­vate sec­tor into the un­pro­duc­tive pub­lic sec­tor over time, the econ­omy was bound to fal­ter.

Of course, one may point to dou­ble-digit wage and pen­sion cuts in the civil ser­vice over the last few years to il­lus­trate how spend­ing has been se­verely con­strained. Although sig­nif­i­cant cuts have been im­ple­mented, one should note that the struc­ture of the pub­lic sec­tor is mostly in­tact and also take into ac­count some other fac­tors. First, pro­duc­tiv­ity – the ma­jor de­ter­mi­nant of wages – is much lower than in the pri­vate sec­tor. Even af­ter the cuts, salaries in the pub­lic sec­tor re­main higher, gen­er­ally speak­ing. This does not mean across the board cuts, which hurt pro­duc­tiv­ity, are jus­ti­fied. Sec­ond, all pub­lic sec­tor em­ploy- ees are paid on time, un­like many of their coun­ter­parts in the pri­vate sec­tor.

Third, there is job pro­tec­tion in the pub­lic sec­tor for tenured em­ploy­ees, so far at least. It is true a few pub­lic sec­tor en­ti­ties have been shut down or merged with oth­ers over the last cou­ple of years, but vol­un­tary re­tire­ment schemes have been em­ployed to re­duce the head­count. This comes in sharp con­trast with the pri­vate sec­tor, where more than 1.3 mil­lion peo­ple have lost their jobs and tens of thou­sands join the ranks of the un­em­ployed ev­ery month, a fac­tor which has pushed the un­em­ploy­ment rate to 27 per­cent.

As far as pen­sions are con­cerned, one should note that the Greek main pen­sion sys­tem is based on the pay-as-you-go prin­ci­ple, mean­ing the cur­rent em­ploy­ees’ so­cial con­tri­bu­tions fi­nance the pen­sions. With the pop­u­la­tion ag­ing and un­em­ploy­ment up sharply, con­tri­bu­tions were bound to fall, en­tail­ing an ad­just­ment in pen­sions in the ab­sence of other fund­ing. This was more so in some “no­ble” pen­sion funds where siz­able in­creases had been granted in the last 10 years or more with the sup­port of the po­lit­i­cal elite. Th­ese ex­ces­sive pen­sion hikes were funded with loans which added to the pub­lic debt.

Although gen­eral government ex­pen­di­ture reached an all-time high at 54.1 per­cent of GDP last year and rev­enues have in­creased by five per­cent­age points of GDP since 2009, the government ap­pears to be fo­cus­ing on tax col­lec­tion to pro­duce a small pri­mary bud­get sur­plus in 2013. In do­ing so, it is play­ing with fire, since there are in­creas­ing signs the pri­vate sec­tor and the mid­dle class in par­tic­u­lar may not be able to shoul­der the bur­den of higher in­come and prop­erty taxes.

Newspapers in English

Newspapers from Greece

© PressReader. All rights reserved.