Planned Greek tax hikes risk more dam­age

The China Post - - COMMENTARY - BY ODILE DU­PERRY AND ROLAND JACK­SON

Greece en­cour­aged global mar­kets with its new debt plan, but some econ­o­mists ques­tion whether its em­pha­sis on tax hikes will do more harm than good to the re­ces­sion-mired econ­omy.

Athens kicked off this week with long-awaited con­ces­sions aimed at re­solv­ing the debt row with its Euro­pean and In­ter­na­tional Mon­e­tary Fund (IMF) cred­i­tors, ad­dress­ing key points that have plagued five frac­tious months of bailout talks.

The Greek gov­ern­ment, which was elected on an anti-aus­ter­ity plat­form in Jan­uary, de­liv­ered pro­pos­als to raise some VAT rates and hike busi­ness taxes, in­crease em­ployee and em­ployer pen­sion con­tri­bu­tions, and nar­row the coun­try’s bud­getary gap.

But how­ever re­lieved those pro­pos­als left stock mar­kets and Euro­pean lead­ers that an elu­sive debt deal may fi­nally be at­tain­able, ex­perts re­main un­con­vinced about the plan’s ef­fec­tive­ness.

“The Greek pro­posal is way too heavy on one-off tax mea­sures ... on the wrong taxes in gen­eral (busi­nesses) and not enough on real re­forms,” said Unicredit economist Erik Nielsen.

The re­vamped plan is aimed at un­block­ing bailout funds, with Greece fac­ing a June 30 dead­line to re­pay the IMF about 1.5 bil­lion eu­ros (US$1.7 bil­lion).

The EU and IMF want Greece to achieve a pri­mary sur­plus tar­get this year of one per­cent of an­nual gross do­mes­tic prod­uct (GDP), fol­lowed by two per­cent in 2016 and three per­cent in 2017.

In or­der to achieve this, cred­i­tors de­manded cut­backs rep­re­sent­ing 1.5 per­cent of GDP this year and 2.5 per­cent next year.

Af­ter months of wran­gling, Athens re­lented on Mon­day and pre­sented mea­sures ex­ceed­ing those de­mands with cuts equal to 1.51 per­cent and 2.87 per­cent of GDP re­spec­tively.

Those should gen­er­ate al­most eight bil­lion eu­ros, mostly through taxes, in­clud­ing the restora­tion of a 23 per­cent VAT on the res­tau­rant sec­tor — the rate ap­plied from 2011 to 2013.

Greek Prime Min­is­ter Alexis Tsipras said Athens had of­fered pro­pos­als that “ex­ceeded” de­mands to bal­ance the bud­get.

“The pro­posed list of mea­sures ap­pears to be fully in line with of­fi­cial cred­i­tors’ de­mands ... com­pared to the pre­vi­ous one, the new Greek pro­posal ap­pears to be much more solid and easily quan­tifi­able,” noted economist Pla­ton Monokrous­sos at Greek len­der Eurobank.

Tax-heavy Mix­ture

How­ever, con­cerns per­sist that the tax-heavy mix­ture of mea­sures could ham­mer an econ­omy that slumped back into re­ces­sion in the first quar­ter of 2015.

“Avail­able es­ti­mates sug­gest that 7.3 bil­lion eu­ros or 93 per­cent of the to­tal of 7.9 bil­lion (eu­ros) of the new fis­cal com­mit­ments by the Greek gov­ern­ment are in­creases in tax­a­tion and so­cial se­cu­rity con­tri­bu­tions,” added economist Ja­cob Funk Kirkegaard at the Peter­son In­sti­tute for In­ter­na­tional Eco­nom­ics.

The only ap­par­ent ex­cep­tions are early re­tire­ment re­forms — sav­ing about 360 mil­lion eu­ros — and a 200-mil­lion-euro re­duc­tion in mil­i­tary ex­pen­di­ture, ac­cord­ing to anal­y­sis cited by Monokrous­sos.

Oth­er­wise, tax­a­tion is the em­pha­sis.

VAT hikes aim to raise 2.04 bil­lion eu­ros, while higher so­cial se­cu­rity con­tri­bu­tions seek to reap another 2.17 bil­lion eu­ros.

Athens mean­while wants to garner a hefty 2.53 bil­lion eu­ros from heav­ier tax­a­tion of busi­nesses.

Kirkegaard noted the pro­pos­als “ap­pear tai­lored to fit Tsipras’ ide­o­log­i­cal im­per­a­tives rather than Greece’s eco­nomic needs.”

A spe­cial 12 per­cent tax hike has also been pro­posed for busi­ness prof­its above 500,000 eu­ros, while com­pa­nies will be taxed at 29 per­cent rather than at the cur­rent rate of 26 per­cent from 2016 on­wards.

Higher in­come earn­ers and lux­ury goods would also be hit with in­creased levies, with sports cars, swimming pools, boats and pri­vate planes all tar­geted.

The broad na­ture of the hikes will likely hurt de­mand fur­ther in the re­ces­sion-wracked econ­omy, ac­cord­ing to CMC Mar­kets an­a­lyst Michael Hew­son.

“Even a ba­sic knowl­edge of eco­nom­ics should tell you that rais­ing taxes when de­mand is shrink­ing is like squeez­ing the juice out of an al­ready juiced le­mon,” he added.

Tsipras, mean­while, faces a tough bat­tle at home to win par­lia­men­tary ap­proval for any ac­cord, and may risk mem­bers of his hardleft Syriza party ac­cus­ing him of back­slid­ing on cam­paign prom­ises.

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