There is a growing number of politicians and academics in Greece, who
argue that the solution to the country’s economic problems is a mixture of
policies, which entail a reduction in taxes and government spending at the same
time. Indeed, if we examine these two policy options separately, or apply them
in another context, it would make sense. Reducing taxes would aim to stimulate
consumption and investment, which could boost economic growth. A reduction in
government spending would save money, improving the country’s public finances.
However, in the case of Greece, there are several counter-arguments to these
claims, which concern the efficiency of this combination.
Even if the Greek government decided to reduce taxes, it is highly unlikely
that the demand for consumption and investment would increase. At least, it
would be not enough to stimulate consumption. Prices are still high in Greece,
mainly due to low market competition. Many firms exercise monopoly power and
oligopolies are established in a number of industries. Moreover, taking into
account that wages have been cut significantly the last 5 years, even if taxes
were lower, the demand for consumption would remain weak.
Regarding investments, there are other factors other than the level of
taxes, which discourage potential investors. One of them is the ongoing political
uncertainty, which will continue to be the case in the coming months, maybe
years. Another factor is the complexity of the tax system and the administrative
burden. Also, One should not ignore global factors, which also play a key role,
such as the volatility in the stock markets and the weak growth in Europe and
other developed countries. Those two have affected investor’s appetite for
investments. Finally, Greek banks still have to address a number of issues such
as the high level of non-performing loans (34.4% of total loans), which have an
impact on the provision of credit to the real economy has not recovered yet.
In the case of Greece, a further decrease in public spending might
offset a significant part of a potential cut in taxes. Since 2010, most of the cuts
in public spending concerned wages and pensions and it appears that the
government’s plans for 2016 and 2017 are similar. Thus, even if taxes were cut,
it is most likely that consumption would not be stimulated. Not withstanding
the abovementioned, public investment has been also reduced. On the contrary, little
has been done to rationalize public spending. This would entail closing down
public enterprises, agencies and organizations, which do not offer public
services any more, other than being a place where affiliates of political
parties can be hired. Last but not least, rationalization would mean reallocation
of resources for many government agencies and a stricter control of
expenditure.
Greece needs a simpler and fairer tax system, where some taxpayers would
not be able to take advantage of its loopholes. Greece should also begin
reforming the country’s independent authorities. Authorities such as the
Competition Commission should be given more power and independency with a goal to
reduce the possibility of being captured by corporate and political interests. According
to the OECD and various researchers, stronger and more efficient regulation is
also a must. Finally, the authority in charge of auditing the public sector, the
General Inspector of Public Administration, should be transformed from a one-man
agency to an independent agency with the required technical capacity and
expertise such as the UK National Audit Office.
The figures do not look good. Government debt is expected to increase
further in 2016 as the economy is still in recession (-0.7%) and it will stand
at around 180% in 2017, which means that high growth rates and a high annual
surplus are required to bring back government debt to healthy levels within 20
years. Despite recent improvements in unemployment, it still stands at
extremely high levels, at around 25%. With low consumption and investment, it
seems quite unlikely that this number could fall below 10% in the next decade. Government’s
budget deficit has been reduced significantly the last 5 years, but there are
still growing risks. The refugee crisis is expected to increase government
spending, if EU funds are not absorbed. Possible delays in the implementation of
structural reforms will not improve or will even worsen Greece’s public
finances.
Panagiotis Asimakopoulos, Economist, Public Policy Analyst
References
OECD, Greece: Competition Assessment Project, 2014
European Commission, European Economic Forecast, Winter 2016
World Bank Database, 2016
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