The funding proposal put to Greece by its creditors would place an onerous burden on the government of Alexis Tsipras, the radical left premier who vowed to end austerity and the cut the national debt when he took power in January.
From Tsipras’s political perspective, any agreement even to discuss debt relief remains elusive and the fiscal measures under discussion would place the weakening domestic economy under increasing strain.
The economy itself is already under pressure due to mounting doubt over Greece’s place in the euro zone, delayed tax payments from worried Greeks and the withdrawal of billions of euro in deposits from its crippled banks.
Official figures show the Greek economy contracted by 0.2 per cent in the first quarter of this year compared with the final quarter of 2014. This was on top of a 0.4 per cent quarter-on-quarter contraction in the final three months of 2014.
Still, the creditors’ plan assumes the Greek government will be in a position to deliver a primary budget surplus amounting to 1 per cent of gross domestic product this year. Such a surplus is the balance in the country’s public finances before the costs of servicing Greece’s vast national debt.
Primary surplus
From European Commission figures, the size of the Greek GDP was forecast in April to come in at about €184.7 billion this year. Therefore, the required primary surplus would be in the region of €1.84 billion.
The plan assumes Greece would double that figure next year and continue increasing it, with the primary surplus rising to 2 per cent of GDP in 2016, 3 per cent in 2017 and to 3.5 per cent in 2018.
Is that feasible? “That sort of gradual increase in the primary surplus is substantial,” said Prof Alan Ahearne, head of economics at NUI Galway. “Not many countries when they’re on their knees have been able to keep increasing the primary surplus and to maintain or sustain a large primary surplus for many years.”
In policy terms, the main points of conflict centre on the creditors’ demands for pension cuts and a long-awaited overhaul of the Greek VAT system.
On pensions, the key concerns on the creditor side are those of the International Monetary Fund. The Washington-based fund has long argued that Greek pension funds receive budget transfers of about 10 per cent of GDP each year. “This compares to the average in the rest of the euro zone of 2½ per cent of GDP,” IMF spokesman Gerry Rice told reporters earlier this month.
“The standard pension in Greece is almost at the same level as in Germany and people, again on the average, retire almost six years earlier in Greece than in Germany. And GDP per capita increase, of course, is less than half that of the German level.”
The IMF has been arguing that the pension proposals would protect the most vulnerable. But any further cuts, after previous cuts, are politically dangerous for the Tsipras administration.
From Wednesday next, according to the creditor plan, the Greek government would have to ensure the retirement age is moved to 67 by 2022. This is 16 years earlier than Tsipras had been willing to concede at the outset, although the last government proposal pushed the date forward to 2025.
In sum, however, the creditor proposal is cast to deliver estimated savings this year of half of 1 per cent of GDP in 2015 and 1 per cent in 2016. That’s roughly €924 million this year, and twice that amount next year. The political implications for an “anti-austerity” leader, who might lose rejectionist MPs in a parliamentary vote, are clear enough.
The tax proposals flow from concern that Greece has among the largest gaps in the EU between collected VAT revenues versus VAT that should be collected given the applicable rate. The prescribed measures are supposed to tighten collection, and there are a couple of concessions to Greece, but the plan is not to the government’s liking.
