Austerity & Tax Reform in Greece
Nikitas Kitsantas // 25 August 2022
In response to the debt crisis, the Greek government implemented excessively high tax rates in an attempt to save the country from financial collapse. However, this resulted in a contraction of the economy and has given rise to the long-term problem of tax evasion. To improve the outlook of the Greek economy, the government must increase its revenues to service its debt by reforming its tax collection scheme while simultaneously lowering the excessively high tax rates currently constraining the economy.
To understand the pressure imposed on the Greek government to implement such high taxation, one must identify the extent of austerity measures implemented after each subsequent debt relief package. After 2008, Greece found itself €300 billion in debt. To safeguard the country from defaulting on its payment, the International Monetary Fund (IMF), European Central Bank (ECB), and European Commission offered a three-stage bailout programme. The first bailout was in 2010, the IMF provided €100 billion in financial support through loans in exchange for a commitment from Greece to implement austerity measures – consisting of reduced government expenditure and tax hikes amounting to €30 billion. The second bailout in 2012 of €130 billion mandated that Greece lower its debt-to-GDP ratio from 160% to 124%. Finally, in 2015, the third bailout with a package of €86 billion was approved, with EU creditors requiring a continuation of Greek austerity measures.
Ultimately, despite the assistance, Greece’s debt to the EU and IMF amounted to €290 billion, compelling Greece to continue undertaking a budget surplus, EU financial supervision, and austerity measures. The effects of austerity measures caused the economy to contract by 25%, with the reduction in public expenditure and a raise in taxes amounting to €72 billion – approximately 40% of the GDP. The duration and degree of austerity imposed were extensive and intensive; however, it is undeniable that the IMF had to impose drastic changes to curb the excessive expenditure by the Greek government.
As the government was required to increase taxes, in the short run, this contracted the economy. However, in the long run, this contributed to the current rise in living costs. The VAT standard rate gradually increased from 18% to 24% between 2005 to 2016 – one of the highest rates seen in Europe. The Greek government also introduced a series of excise taxes on staple goods. For example, it doubled the tax on beer, introduced a tax on coffee, and increased taxation on the final consumer price of tobacco from 75% (2008) to 90% (2016 onwards). Greece also has one of the highest tax rates on communication – hindering Greece’s digital transformation – ranking the country third to last in the 2021 DESI index. The corporate tax in Greece stands at 22%, which is among the higher rates in Europe; and businesses, in general, are taxed at 29% compared to the EU average of 22.5%. Consequently, key sectors such as tourism have suffered from legislations like the 2016 “Overnight Stay Tax”, which – according to a Grant Thornton study – decreased hotel revenues by €435 million, making tourist packages less attractive in such a competitive region of the EU.
Overall, the Greek Harmonized Consumer Price Index (HCPI) rose considerably higher than the average EU HCPI, especially during the internal devaluation period when the austerity measures were enforced. Such high taxation has strained Greek business operational costs and increased their vulnerability to further supply or demand shocks, which has resulted in the current cost-push inflation.
Turning toward the future, Greece is still faced with the challenge of reducing its national debt. Rather than continuing with excessive taxation, Greece must solve a more entrenched issue – tax evasion. The amount of tax evasion between 1980–2018 increased by 275.94%. According to a public opinion poll conducted by diaNEOSIS, 41% of Greek citizens believe that “tax evasion is a legitimate defence against excessive taxation” and 37% believe that high tax rates are the cause of tax evasion. The previous statements are supported by a separate study (see Figure 2), which highlights a strong positive correlation between both the level of tax and tax evasion (0.94), and the level of taxation and the shadow economy as a percentage of GDP (0.85).
Therefore, we conclude that the Greek government can increase its tax revenues by reforming its public administration and bureaucracy, revising tax legislation with a focus on simplification and increasing transparency to attract investments, and reducing compliance costs through the digitalisation of the tax system. Such changes may be more effective in helping Greece to continue repaying its national debt, while simultaneously improving the efficiency of one of the most key roles of the government.
In reflection, the extensive and intense requirements that accompanied the bailout programmes for servicing Greek government debt demonstrate the importance of maintaining governmental budgets and avoiding excessive expenditure. Moreover, one must understand that without solving the long-term underlying problems, even credible short-term solutions will inevitably fail and harm the overall economy.
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