Brussels, 25/08/2015 (Agence Europe) - The social impact analysis of the third bailout plan to Greece, which was carried out by the European Commission by express request of President Juncker, seems to have provided the European institution with the opportunity to justify certain somewhat unpopular fiscal and budgetary measures which made waves in the negotiations between the Greek authorities and the eurozone.
One of the most controversial measures regards the unification of the normal value-added tax (VAT) rate at 23% (also for restaurants, which previously enjoyed a reduced rate) and the phasing out by the end of 2016 of the VAT reductions for the islands of the Aegean Sea. A reduced VAT rate of 13% applies to base food products, water, energy and hotels. An even lower rate, 6%, applies to pharmaceutical products and books.
On the basis of an OECD report, the Commission notes that experience has shown that the reduced VAT rate for restaurants (decided upon under the Samaras government with the agreement of the 'troika') benefited high earners seven times more than low earners. “On that basis, it was decided that increasing VAT on restaurants to the normal rate would have positive distributional effects”, it states in the report it published last week. As regards VAT applicable to hotels, the advantage has been calculated to be 15 times higher for high earners than for those on a low income.
As regards getting rid of the VAT reductions for the islands of the Aegean Sea, the Commission explained that a number of these islands have a per capita income higher than the national average income, sometimes by a considerable margin, whilst certain other regions of Greece are poorer and do not enjoy the same reductions. Phasing out this preferential regime in the Greek VAT system is therefore a question of fiscal fairness, in the view of the European institution.
More generally, the Commission also stresses that in a country “where income tax evasion is still significant, consumption tax is a necessary means to collect tax revenues from the entire population”.
The Commission has focused on this point at length, firmly believing as it does that high levels of inequality and tax evasion go hand in hand. The French finance minister, Michel Sapin, himself acknowledged that the governments which came before Syriza had not been particularly “vigourous” in the fight against tax evasion. This is also the impression the Commission's task force got when it arrived in Greece (see EUROPE 11272).
The recommended reforms, the Commission stresses, will lead to the creation of an independent tax collection authority, in order to “address the chronically weak enforcement situation”.
However, the Commission has its doubts as to the virtues of increasing the corporate taxation rate, which will rise from 26% to 29% from 2016. When taken in conjunction with the increase in advance payments of profit tax from 75% to 100%, it feels that this measure could have adverse effects on the attractiveness of investment and add to the liquidity crisis for businesses. Hence the importance of other measures to mitigate these effects.
Pensions. The savings to be made by the government on pensions also made waves during the negotiations on the third bailout plan. The Commission has already explained that the Greek pension system was one of the most expensive in the whole of Europe. In its impact assessment, it stresses that reforms were scheduled in 2010 and 2012 to make the regime financially viable, adequate and fairer, but that these reforms had not been fully implemented.
The latest reforms (pension age of 67, limiting the use of early retirement pensions) will, according to the European institution, have the effect of promoting longer careers. By making a greater contribution to the Greek pension regime, workers will be able to benefit from higher pension payments.
Minimum income. In the framework of the second bailout plan, a guaranteed minimum income was introduced in 13 areas under a six-month pilot phase (27,000 beneficiaries). This measure will be rolled out to the whole of Greece between now and 2017. According to the Commission, it will constitute a “key component of the country's new social protection architecture”.
The Commission recognises that Greece has made significant efforts since 2010 to consolidate its public finances and that overall, this adjustment has had a direct negative impact on households. In light of the exemptions in place to protect the most vulnerable groups, and of an OECD report, the Commission explains that generally speaking, budgetary consolidation had the greatest effect on high earners. In the autumn of this year, an additional budgetary effort in the order of 0.75% to 1% of GDP will be specified, in order to reach the medium-term target of a primary budgetary surplus (not including debt servicing) of 3.5% of GDP in 2018 (see EUROPE 11372). (Elodie Lamer)