By Poul M. Thomsen
The overriding objective of the IMF’s engagement with Greece is to help the
country put itself back on a path of sustainable growth that benefits the Greek
people. In this regard, we think that the current structure of the Greek budget is a
serious constraint on growth. Below we provide a more detailed explanation of
why the Greek budget in its current form is growth unfriendly, and why solving this
problem requires tax and pension reforms.
In an effort to boost revenues, Greece has
followed a policy of repeatedly hiking
already high tax rates, instead of
broadening the tax base. It has not worked.
After years of this policy, Greece faced
increasing resistance by taxpayers in 2014,
which prompted the authorities to resort to
installment and deferral schemes, even
though the pervasive use of su
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of the base is exempt, respectively (the average for the rest of the Euro Zone is
around 8 percent). In nominal terms, Greece’s tax-free threshold of €8,750 is among
the highest in the Euro area, higher than in Germany, Italy, or Spain. This also implies
that the burden of taxation is extremely skewed in Greece, with the highest decile of
wage earners accounting for nearly 60 percent of total income tax revenue.
It is certainly true that those who earn the most should contribute the most. But
the exceptionally generous exemptions of the middle class that apply in Greece
cannot be justified by arguments about social fairness and justice. The wholesale
exemptions are anything but socially fair and just, as they prevent Greece from
raising the revenues it needs to pay for well-targeted social benefits common in the
rest of Europe, such as welfare and unemployment. In our view, broadening the tax
base while lowering the high marginal tax rates should be a priority.
Moreover, the Greek authorities’ reliance on
further compression of discretionary
spending is not credible. Spending on goods
and services, for example, has been slashed
dramatically in recent years and is by now
reduced to exceptionally low levels by
European standards (Chart 4). Indeed, we
believe that this compression cannot be
sustained, as is evident from complaints that
hospitals are functioning without syringes,
buses are immobilized by lack of spare parts, etc. In view of this, we find it both
highly implausible and undesirable that discretionary spending would decline by a
further 2 percent of GDP by 2018, as the authorities expect. With no underlying
public sector reforms to generate efficiency gains, targeting such a further
compression would imply an even more severe impairment to deliver basic public
services, which is not credible and cannot be supported by an IMF arrangement.
At the same time as basic public services are
being squeezed to unsustainable levels,
spending on pensions remains unaffordable.
Greece pays an average nominal public
pension similar to Germany’s, despite having
much lower productivity. It can only manage
to do so through budgetary transfers to the
system that are more than four times the
Euro area average (Chart 5). But dealing with
pensions has proven extremely difficult.
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Previous governments have attempted to reform the system, but have been faced
with court rulings that stopped them and with other setbacks. While the current
government has renewed efforts in this area, the recent reform, which aims to
reduce budgetary transfers to the pension system by about 1 percent of GDP, is far
from sufficient to address the scale of the problem (a deficit of nearly 11 percent
of GDP).
As with the tax system, maintaining such high pensions while at the same time
denying the population access to basic welfare benefits is neither fair nor socially
sustainable. It has been often argued that in Greece, pensions should remain high
because they not only serve to protect incomes in old age, but also act as an
informal social safety net. However, it is clear that pensions are no substitute for an
adequate safety net, as this ad hoc arrangement has not been able to address the
rise in poverty of the most vulnerable groups. In fact, the evidence suggests that
high pensions have had the opposite
effect, constituting an implicit transfer
from the most vulnerable members of
the working age population to older
Greeks. The poverty rate for the
working-age population, especially the
unemployed, has been rising rapidly
since 2010, while pensioners have
seen a correspondingly large reduction
in poverty levels (Chart 6). To address
this problem, the authorities should
further reduce current pensions while increasing spending on a modern and welltargeted welfare system to protect those that are most in need. More should be
spent on other essential public services and key public investments too.
Rationalizing current pension benefits would also ensure a fairer inter-generational
burden-sharing of the reform costs.
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