Tuesday, 14 September 2010

The Good News from Thessaloniki

Perhaps for the first time since the present financial crisis broke, I see encouraging signs of progress in the way the PASOK government made its case at the Thessaloniki International Exhibition. The reasons for this are both due to what was said, and what was not.

On the tangible side: Both the Prime Minister and the Minister of Finance made an explicit case for continued reforms, including the liberalisation of closed professions, continued tax inspection, and public sector reform. Some of the interesting initiatives announced include:

·         A potential reduction in corporate income tax rates from 24% to 20% in 2011, accelerating the schedule of tax reform initiated by the Karamanlis government. This is potential, because the specific measure announced is to reduce the tax for reinvested profits or dividends, while the Ministry is studying the impact of making the measure apply to all profits and dividends from 2011.

·         A final tax assessment, or “closure” (περαίωση) under which companies and individual professionals will pay a fee for the final closure of tax years 2000-2009.

·         Additional employment support for up to 500,000 places of employment through a 50% (or subsidy) of social payroll taxes.

While these are not in themselves significant enough to engender an economic recover, they are encouraging signs that the government understands the need to improve the business and economic environment of the country, and support employment-creation measures.

Indeed, the President of the Hellenic Chamber of Commerce and Industry described these measures as “aspirin”, given the more competitive tax systems in Cyprus or Bulgaria. But we must reflect that one of the main sources of the deficit in Greece is the fact that companies and independent professionals do not pay their full tax assessment.

I therefore assess them as a net positive. The tax closure in particular is expected to result in EUR 2.5 bln in “additional” income being declared for the years 2000-2009. This has a double benefit, in that 25% of the tax must be paid as a downpayment, and that a large number of legal cases currently in court could be resolved through this settlement, freeing up the court system to address other issues.

If this tax closure does take place, the Ministry of Finance may be on track to achieving its EUR 18 bln deficit target in 2010. In addition to the extra EUR 500-2,500 mln from the “closure”, the Ministry will gather at least EUR 1 bln in vehicle circulation taxes in December, together with the QIII VAT payment in September-October. These could close the gap in deficit spending, although it is too early at this point to tell if these can be collected within financial year 2010.

The Thessaloniki was also notable for what wasn’t said. Contrary to expectations, there was only minimal pandering to the electorate in the form of government hand-outs. (We should make no mistake here: a tax closure, corporate income tax reductions and subsidy of payroll taxes are certainly a form of hand-out for companies).

Some additional measures announced deserve comment:

·         The Prime Minister confirmed that there would be no equalisation of VAT on heating fuel and unleaded gasoline, since a mechanism for social equity was not in place. If we read between the lines here, it appears that the choices will either include raising the tax on heating fuel to the tax on gasoline, or raising the minimum VAT level from 11% to 13%. This issue will be decided and postponed until 2011.

·         A range of measures have been announced to increase female employment. This is an area Greece needs to do much more work in, since it has among the lowest female employment rates in the European Union, and thus marginalises a valuable human resource for the country.

·         A range of initiatives on liberalisation of closed professions, streamlining bureaucracy, restructuring semi-governmental organisations, promoting investments, and other points were promised. Some important ones here include restructuring the court system to provide for the more rapid settlement of legal cases; privatisations; liberalisation of the energy sector; completion of a Single Payment Authority; bank sector restructuring; health sector procurement reform; and others.

These initiatives, should they be implemented, will be among the boldest and most far-reaching reform of the public and private sectors ever attempted in Greece

The first signs are small, but encouraging. The price of pharmaceuticals purchases has apparently declined by up to 25%, according to the Minister of Finance. The truckers strike, scheduled for Monday and Tuesday, has so far been dealt with firmly by the police, with the result that the truckers have not entered Constitution Square as they had in July. Four large renewable energy investments have been announced. A Coordinating Committee of key ministers meeting under the Prime Minister has been set up

The problem Greece faces, however, is not so much the scale of reforms, as the pace of their implementation given the scale of problems in total. For every reform announced, there seem to be 2-3 negative issues holding Greece back.

·         In the pharmaceutical procurement sector, for instance, despite the price reduction, the debt settlement for previous years has still not been implemented, and pharma providers are threatening to withhold supplies from public hospitals. There are press reports that unpaid pharma invoices so far in 2010 amount of over EUR 1.7 bln.

·         The truckers may be acting in a more civilised manner, but the entire issue of tax evasion and price setting in the petroleum refining, distribution and retail value chain will continue to be a barrier to the transparent development of this sector. Gasoline sales are being used as a tax collection mechanism; most filling stations operate at a loss on their primary gasoline sales.

·         In the energy sector, the fear is that the “liberalisation” is being accomplished in such a way that favours the entrenched monopolist, DEH, which has set up its own renewables firm with a EUR 2 bln budget.

·         Investments in the energy sector are taking far too long, primarily because the Renewable Energy Authority claims to lack staff. Of the four projects announced yesterday, the SunRay and EDF projects have been under study for 3 years; while the Rokas and Ellaktor projects for 4 years. The total value of these projects amounts to EUR 2.072 bln; the output will reach 835 MW.

·         The backlog of projects under study apparently amounts to thousands of MW: the danger is that, as in other EU countries, a main investment incentive is the ability to sell renewable energy to DEH (or other customers) on a “green tariff”. The experience of Spain, Germany and other countries, however, indicates that this green tariff may be too high under market conditions, and too high for the government to subsidise. A future change in incentives may therefore be necessary to prevent yet another “green bubble” from emerging.

Such reforms would be difficult to carry out even in a relatively healthy economy (as the public sector and pension reforms in the UK and France demonstrate). In a time of economic crisis, they are even more difficult.

But it seems that the reform train has left the station: let’s hope its momentum in the next months will increase, and tangible benefits start becoming apparent at the ground level in this country.  

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