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Is VAT all you've got?
Grabbing a coffee for 20 cents less doesn’t really sound like the start of an economic recovery but who knows, maybe after this week’s decision to cut value added tax at restaurants and cafes, Greece will soon be measuring out its success with coffee spoons.
Naturally, the government has made the most of the skeptical troika finally giving in on a longstanding Greek demand for VAT in the food service sector to be reduced from 23 to 13 percent. Even so, Prime Minister Antonis Samaras announcing the temporary measure in a televised address was a touch excessive given he only informed the nation that a nightclub drink would soon be about 50 cents cheaper. For the government, though, the symbolism of the reduction is perhaps more important than its economic impact.
Samaras presented it as a personal triumph of persistence. Deputy Prime Minister Evangelos Venizelos said it was a sign that the troika had begun listening to Greece. Indeed, the VAT reduction represents something of a milestone in the Greek bailout program as tax hikes have been the norm and a regular source of much anger over the last three years. It was billed as the first tax cut since the program began, which is not quite accurate. Technically, it was the second as a 15 percent reduction in the emergency property tax introduced in 2011 had been agreed a couple of months earlier. This came after pressure from Democratic Left, which was still part of the coalition at the time. There was no televised address, though.
The government hopes the VAT cut will boost one of the biggest employers in Greece’s all-important service sector and make the country’s tourism sector more competitive against its rivals. However, introducing the tax reduction on August 1 for a trial period seems to undermine the aim of attracting more customers. One imagines that an agreement earlier this year, which could have been communicated widely and loudly to visitors, could have been a real boon. Equally, a reduction of the rate to 13 percent, where it was two years ago, is far from enough to give Greece a decisive edge over its competitors for tourists’ spending money. In Italy and Spain, for instance, restaurants charge 10 percent VAT. In Cyprus it is 8 percent.
Then, there is the question of whether restaurateurs and cafe/bar owners will pass on the savings to their customers. It is difficult to imagine they will follow this path in the middle of the tourist season when they stand to gain little or no extra business from doing so. Instead, paying less VAT will allow them to hold on to more profits. It is worth noting that after the UK government implemented a VAT cut in late 2008, the Office of National Statistics found that about a third of businesses did not reduce their retail prices.
In his address, Samaras also told his audience that if there is no improvement in tax compliance among restaurants and bars, the measure will not be made permanent. His warning seemed to send the morally questionable message that the tax cut was an incentive for the sector to comply with a law that many other businesses already follow.
Finally, to convince the troika to approve the temporary measure, Greece had to agree to slash about 100 million euros from its defense budget. This is roughly how much the country’s lenders estimate will be lost in tax revenues and they cannot allow any room for the possibility of Greece not producing a primary surplus this year.
All in all, the VAT change is a breakthrough of sorts for Greece but much less than a triumphant achievement. From the troika’s side, it appears more of an attempt to fob the government off rather than a genuine concession aimed at stimulating the economy.
There is also a risk, especially as the new tax code is currently being prepared by the Finance Ministry, that the focus on the VAT in just one sector masks a much more serious economic problem. While hospitality may, or may not, profit from VAT dropping to 13 percent, businesses in all sectors of the Greek economy will continue to labor under an incredibly burdensome tax system.
Currently, many businesses pay 26 percent company tax and another 10 percent on redistribution of profits. They also have to prepay 80 percent of their tax for the next year. This means that the total tax bill works out at more than 40 percent of profits and leaves a company making 50,000 euros with more than 20,000 euros to pay in taxes. This amount, of course, will be cleared and some businesses will receive returns but the sluggish rate at which the Greek state is dealing with its arrears means this is of little comfort to businesses strapped for cash.
So, while we wait to see what impact the VAT reduction in the food service sector has over the next few months, there are thousands of Greek businesses that will enjoy no such fillip. Fighting for survival in a depressed, demand-deficient, liquidity-parched economy, they are being incessantly hammered by their own government and its lenders. For them, a cheaper cup of coffee is no consolation at all.