Athens deserves slack from creditors
After last year’s forecast failure, the troika should be less intransigent on its fiscal gap estimate for 2015
ANALYSIS Talks between the government and the troika about the pending review of the Greek economic policy program have stalled over a number of issues, most prominently next year’s fiscal gap. Although politics play a significant role in the current talks, steps should be taken to bring the two sides closer. The government should contribute more to the fiscal effort without taking new measures and the lenders should give Athens the benefit of the doubt. After all, it makes no economic sense to try to close a disputed fiscal gap when the cyclically-adjusted primary surplus is estimated at double the program target.
Finance Minister Gikas Hardouvelis said recently that the troika is putting pressure on the Greek side to close next year’s fiscal gap, which the government does not recognize. Press leaks suggest the troika is estimating that Greece will need an additional 2 to 3 billion euros in budget savings and/or extra revenues to meet the primary budget surplus target set at 3 percent of GDP in 2015. The government does not agree and tabled the 2015 budget in Parliament last week without taking the troika’s position into account.
The government argues that the troika is repeating the same mistake it made last year in identifying a fiscal gap for this year’s budget. It goes on to say that the Greek economy would have suffered had it listened to the demands of the lenders in the fall of 2013 and taken more austerity measures. Indeed, the 2014 primary budget surplus is estimated at 1.8 percent of GDP, surpassing the target of 1.5 percent, while the economy is seen growing by 0.6 percent or more this year. Of course, politics is playing an important role as well.
On the other side, the troika insists there is a fiscal gap and is demanding that measures be taken to close it, with the IMF reportedly adopting a tougher stance than the European Commission. The troika estimates that a new payment scheme for up to 100 installments to settle arrears will widen the budget gap along with other tax cuts and payments to the judiciary and the armed and security forces. It is estimated the state will pay more than 500 million euros to the judiciary, the armed and security forces and their retirees next year to partially settle arrears and reinstate salaries and pensions to levels prior to the summer 2012 cuts.
Obviously, the two sides are far apart on this issue and need to come closer for a deal to be possible. At this point, it is hard to say who is right and who is wrong but last year’s misestimation by the troika is a factor. This is another reason for creditors to give the coalition government the benefit of the doubt and avoid undermining economic recovery with new measures if their estimate is wrong again. However, there are a number of steps that can be taken to bridge the difference with no new measures, not including the impact of expected debt relief measures.
The government earlier this year paid out a so-called “social dividend” of 37.5 million euros to the armed and security forces solely on the basis of individual gross monthly income of up to 1,500 euros. Moreover, the state also paid about 70 million euros linked to promotions in the armed and security forces in violation of Law 4046/2012 which demanded a freeze on promotions, according to various press reports. Therefore, the state could lighten next year’s budget expenditures by up to 100 million euros or more by offsetting the above payments with the sum to be paid to the same groups of people.
Another step could be for all salaried employees in Greece to be taxed in the same way by abolishing tax breaks granted to special interest groups. This would have gained popular support as it would have included lawmakers who enjoy a large tax exemption, potentially up to 70 percent of their income, and stopped others, such as judges, from demanding equal tax treatment, citing the Constitution.
Also, income but not property criteria should be applied to the payment scheme of up to 100 tranches for tax and social security arrears. It does not make sense for people with high incomes and fat bank deposits or other liquid assets who can pay to take part in the scheme. However, it should not be applied to people in low and middle income brackets and with small real estate assets because the latter are a liability and cannot be sold right now.
Moreover, it is hard to justify on any grounds, except for votes, why Myconos, Santorini and other cosmopolitan islands should continue to enjoy lower VAT rates compared to other tourist destinations or poor areas of the country and districts in big cities like Athens. Also, Greece should also make a commitment that it will not distribute a “social dividend” next year and that any excess amount over this year’s primary surplus projected at 1.8 percent of GDP will be “transferred” to the 2015 budget.
These are some of the moves Greece could make to break the impasse over the disputed fiscal gap. On their part, the lenders should recognize how fragile the economic and political situation is and give the government the benefit of the doubt, agreeing to revisit the issue at some point next year. This approach makes economic sense as well since the European Commission puts the structural budget surplus excluding interest payments on the debt at 5.8 percent of GDP in 2015, almost double the 3 percent target.
This cyclically-adjusted primary surplus, which takes into account the ups and downs of the economy and does not include one-off and temporary measures, is representative of the underlying fiscal stance and implies new austerity measures are unwarranted from an economic point of view.