After having been in an economic crisis for almost 8 years now, the Greek economy has signed three Memoranda in order to be able to get access to more loaning from the creditor states of the Eurozone to finance the budget deficit Greece has been running from 1974 onwards (!). At the same time, the Greek population had become used to the “borrowed prosperity” that occurred from 2000-2008, when loans were granted out relentlessly, infrastructure was being developed and upgraded (as the new airport and the new subway lines that were built for the 2004 Olympic games), taxes were lowered, and wages, benefits and pensions increased. All this was about to change after the 2009 crash of the Housing Market in the United States. Greece was no longer able to loan out cheap money and measures had to be taken in order to finance the budget deficit.
To put everything into context, all Greek governments since 1981 were obliged to increase borrowing which in the course of 10 years rose by 80% of the GDP. In 2008 Greece had at the same time very high public debt, high fiscal deficit and no lenders in order to renew the public debt. Moreover, Greece has a MASSIVE public sector, most of which is highly unproductive and earns very high wages. Despite this, NOT ONE of the public sector workers has been fired, ever… It is considered a taboo to fire workers in Greece and every government has found other ways to make up the money of the wages. In this blog, we are going to focus only on the tax increases, which is th
e most common measure.
In 2010, Prime Minister George Papandreou, proposed to the parliament the first Memorandum which would allow Greece to secure almost 100 Billion Euros in funding, in exchange for lowering the budget deficit to under 3% by 2014. Part of the measures included tax increases, which were met with a lot of opposition by both the public and the left wing parties, especially SY.RIZ.A which is now the governing party. Nevertheless, due to the severity of the situation, the Memorandum was passed.
In February 2012, following the failure of the first Memorandum, the Second Memorandum was signed by now PM Loukas Papademos which provided a 100 Billion Euro haircut in the debt of Greece in exchange, once again, for more austerity measures. Greek parties could not agree on the deal so a provisional government was set up, following the resignation of Prime Minister George Papandreou.
Finally, in 2015, left wing Prime Minister Alexis Tsipras that had come into power in January of that year, following early elections by the resigned PM Antonis Samaras, was forced to sign the 3rd Memorandum after very long and hard negotiations with the creditor nations. Being a left wing government, Tsipras continuously refused to fire public sector employees and turned to even more taxes in order to achieve the goals set forth by the signed agreement. It is important to note that the public sector wages take up 55% of the nation’s GDP.
According to ELSTAT, the Greek Statistics agency, the debt of the Greek Economy constantly rose from 1970 onwards, having passed a period of 13 years without having great disruptions. One can argue, thus, that the prosperity the Greek Economy was having all those years up to 2009 was completely borrowed. There came a point, though, where foreign banks were no longer able to provide cheap loans and the budget deficit started to present itself.
The debt initially had the form of government bonds which were slowly replaced by loans by the IMF and the creditor nations of the Eurozone, like Germany and France.
With all that in mind, we turn to the important analysis which is the effectiveness of the increase of taxes. In the graph below, we see the income of the governments from the period between 2009 and 2015, the income tax income from the same period, as well as the income from the VAT after 2011. After many increases of the VAT (for example the 13% to 23% in restaurants and taxis in 2015) and the income tax, instead of the governments seeing increased income, they have witnessed a continued drop. This means that all these measures taken that have dissatisfied the citizens greatly are not working at all… It seems that more and more people have turned to tax avoidance in order to keep their income steady. This hurts the government a lot. More and more people decide to not cut receipts and the Greek S.E.C. (ΣΔΟΕ) is unable to keep up with the problem and effectively deal with it.
Furthermore, the increase in all forms of taxes has greatly lowered the income of consumers which, in turn, buy less products. The result of this is that firms see a decrease in their income both from the increased corporate taxes and from the reduced demand they are facing. In order to cope with this income reduction, firms try to reduce their expenditure, often firing employees in the private sector.
ELSTAT shows that there is an inverse relationship between real GDP changes and unemployment. The peak was reached in 2013, with more than 27% of the work force being unemployed and the people in the ages of 18-24 experiencing rates close to 60%.
The above have the result that the quality of life of most Greek families has decreased. More information from ELSTAT, shows that the Greeks have been affected the most by the increase of the VAT in heating petrol. In a period of four years, households have turned away from central heating towards cheaper heating means like natural gas and stoves (although much less eco friendly). Others try to use their AC units both for cooling and for heating, saving on the costs of supplying their house with petrol or natural gas.
Such is the situation with the consumption of basic goods. Families are turning more
and more away from meat, fish and fruit, on towards cheaper options, like rice and pasta. What is good, though, is that the great increases in the taxes of demerit goods has paid of greatly, considering the very inelastic demands of alcoholic beverages and cigarettes. It is true that this data is not representative of all Greek families, but the reality is that each and every family has been affected in one way or the other by this economic crisis.
Concluding, the increase in taxes for the Greek economy has not paid off as expected due to various factors like tax avoidance. Nevertheless, the quality of life of the average greek household has decreased significantly and governments are continuing their policy of burdening all classes instead of just reducing the size of the public sector. If Mr Tsipras does not switch his policy quickly, I am afraid that the road out of the economic crisis is going to be a hard and long-term one.