Athens de­serves slack from cred­i­tors

After last year’s fore­cast fail­ure, the troika should be less in­tran­si­gent on its fis­cal gap es­ti­mate for 2015

Kathimerini English - - Front Page - BY DIM­ITRIS KONTOGIANNIS

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.

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