Athens prepares final 2019 budget after green light to ditch pension cuts
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Athens aims for November agreement with lenders on pension cuts
How big is the gap separating Greece and the institutions?
The document with the prior actions proposed by lenders that was leaked on Wednesday revealed significant differences and deviations from the latest Greek proposal, which suggests the two sides have a huge task on Thursday to bridge their gaps.
The Greek government sent on June 23 an 11-page document including measures totalling 2.69 billion euros for 2015 (1.51 percent of GDP) and 5.21 billion for 2016 (2.87 percent of GDP) that would result in a primary surplus of 1 percent of GDP for 2015 and 2 percent for 2016, which is in line with the institutions’ proposal.
However, the lenders reverted to their own joint proposal presented by European Commissioner President Jean-Claude Juncker to Greek Prime Minister Alexis Tsipras on June 3, while adding some of the measures proposed by Greece,
Given that the first proposal put forward by Juncker was rejected by the Greek government, it is clear how difficult a task it will be to reach a compromise.
On VAT, the institutions insist on revenues of 1 percent of GDP on an annual basis compared to the 0.74 percent proposed by the Greek government. This creates a gap of 470 million on a full year basis with half of this amount related to this year since the new VAT rates will be effective from July 1.
Apart from the total estimated proceeds, a key difference lies with the allocation of products in the VAT rates. In particular, the institutions stress that “unprocessed” food would be included in the reduced rate of 13 percent instead of “basic” food proposed by Greece. This means that a large scale of basic food products such as milk, cheese and oil would be transferred to the higher rate of 23 percent meaning a 10 percent rise in their current price.
Another thorny issue is the VAT rate on food service. The institutions propose this to be moved to 23 percent (from 13 percent currently), which would have a negative impact on one of the most prominent sectors of the Greek economy that is also connected to some extent to tourism.
The new institutions’ proposal also axed a number of fiscal measures proposed by the Greek government meaning these have to replaced by other equivalent measures. The measures that were removed or modified from the Greek list are as follows:
1) The increase in the employee and employer contribution for main pensions by 3.9 percentage points (pp) restoring them to the prior to July 1, 2014 levels, when then previous government had slashed them. This measure was removed creating a fiscal gap of 350 million for 2015 and 800 million for 2016
2) The increase in the health care contribution for pensioners for their main pensions by 1 pp from 4 to 5 percent. The institutions insist they should be further raised to 6 percent, creating a gap of 270 million in 2015 and 540 million for 2016.
3) The increase in the pensioners’ health care contribution for their supplementary pensions from zero to 5 percent, whilst the institutions propose a higher rise to 6 percent. This creates a gap of 48 million for 2016.
4) The increase in the employee contribution for supplementary finds from 3 to 3.5 percent with estimated revenues of 120 million for 2015 and 250 million for 2016. The institutions propose this measure to be removed.
Corporate and income tax
1) The Greek proposal for a special tax of 12 percent on corporates with profits above 500,000 euros is axed creating a gap of 945 million for 2015 and 405 million for 2016.
2) The institutions agree on a rise in the corporate income tax rate but at a lower rate from 26 to 28 percent compared to 29 percent proposed by the Greek government. This creates a gap of 137 million for 2016.
1) Revenues from a 30 percent tax on gross revenues of Video Lottery Machines (VLTs) with estimated revenues of 35 million for 2015 and 225 million for 2016. This measure has been axed by the institutions
2) Revenues from the 4G and 5G licences of 350 million for 2016 is removed by the institutions.
3) The institutions propose a higher cut in defence spending by 400 million compared to 200 million proposed by the Greek government.
Including VAT, all the measures that have either been removed or modified from the Greek proposal create a fiscal gap of around 2 billion euros for 2015 (1.1 percent of GDP) and 3.4 billion for 2016 (1.9 percent).
Moreover, the institutions insist on the implementation of the zero-deficit clause for supplementary pensions retroactively from beginning of this year. This was one of the government’s red lines. It proposed the postponement of this measure at an estimated cost of 326 million.
On top of this, lenders have for the first time urged the government to adopt legislation to fully offset the negative impact from the recent Council of State (CoS) ruling restoring pensions to 2012 levels. This has an estimated cost of 1.2 – 1.5 billion on an annual basis.
In a previous similar CoS ruling for the armed forces last year, the previous government had responded with a 6-month delay, paying back only half of the outstanding amount in installments. Therefore, it is not clear at the moment how the Greek government will handle this issue.