The big target for the Greek government has been to reduce the primary budget deficit (ie for the government to be able to run day-to-day without going into more debt)
The Greek government has also been congratulated for shrinking the primary deficit but let us look at the methods used by the Greek government and see if they are the sort of measures the international media should be encouraging.
This is an article from Reuters which goes into great detail about Greece’s situation, it is well worth a read.
Here is the piece of the article that deals with the Greek government primary budget surplus.
The primary balance was in deficit in 2009 to the tune of 10.4 percent of GDP. This year, it is projected to show a surplus of 0.2 percent.
“Although they’re not given much credit for what they’ve done, there are not many countries that have brought their primary deficit down as quickly as Greece has,” said Andrew Kenningham of Capital Economics, a consultancy in London.
RUNNING FASTER TO STAND STILL
And yet Greece will still have an overall budget deficit of 4.7 percent of GDP this year because of a huge interest bill.
This is estimated at 4.9 percent of GDP, rising to 6.3 percent of GDP in 2013, even assuming that a deal is clinched to write down the bonds owned by Greece’s private-sector creditors by 70 percent.
To reduce the overall deficit, the EU and IMF are prescribing an increase in the primary budget surplus to 5.0 percent of GDP in 2014 and 2015.
“What the troika is effectively working into its plans is an adjustment in Greece that will go on for many years,” Dadush said.
Weisbrot said the planned interest burden was the highest in the world, except for Jamaica: “These guys are going to squeeze them forever. There’s no light at the end of the tunnel.”
After I read this I was about to jump in and say that this shrinkage of the primary budget surplus was a short-term bonus for the government and that as the economy plummeted and taxes increases stopped, the primary budget surplus would expand again, in anger.
But then I realised what has happened.
I have written before about how the tax increases in Greece have been completely unfair and completely disconnected from income but only now do I realise why the Greek government has imposed such unfair taxes.
It is to control the primary budget deficit.
The Greek government over the past 3-4 years have imposed huge tax increases which are fixed, ie the taxes have to be paid whether the person is in work or not.
Let me give you some examples.
The car you drive.
Income tax in Greece takes into consideration the car you drive. So if for example you drive a BMW 320i, the government says you must earn X Euro to keep it on the road so you have to pay income tax on that amount. Even if you have lost your job, you still have to pay income tax.
And this type of taxation, ie taxation which is completely unconnected to income is not reserved just for cars. Your home is also used in the same way. If you have a house of X square metres it means you must earn X Euro a year so you have to pay tax on that “income” regardless of whether you actually have a job or not.
And this how the Greek government is controlling the primary budget surplus. They are imposing taxes on the Greek people which remain the same regardless of whether Greeks are working or not.
But if you think that is bad, there is more.
There is now an emergency property tax (in addition to the normal property tax that goes to local government). This property tax has to be paid whether the owner of the property is working or not, whether the property is being used or not.
Fuel tax. The price of petrol in Greece has gone from the cheapest to the second most expensive. There is only so much you can cut down on your travel, when it gets to the bare necessities of going to work or shopping you cannot escape this tax.
But the fuel tax is not only on petrol and diesel. The same tax increase have been levied on natural gas and heating oil. So the only way to escape these taxes is to not heat your home and start to BBQ more regularly.
And let me just put in another tax for you. VAT on firewood. Yes, you read that right.
And let me give you one more example. Income tax, on last years income. Yes, even if you have lost your job this year, and you have already paid your income tax on last years income, the Greek government has asked people to pay a 1% income tax on the income they had last year, even if they no longer have a job.
There really is no escape from these taxes. I thought it was just incompetence or maybe blatant cruelty.
But now I understand why taxes which are independent of income have been introduced.
These grossly unfair taxes have been levied solely to keep the primary deficit under control. So the government gets a set income regardless of how well the economy does.
Oh, I just thought of another utterly cruel tax, perhaps this is the most cruel of the lot. VAT of 13% on food, 23% if the food is pre-prepared, ie burgers, chicken kievs, cakes etc from the supermarket.
I mean how the hell are you supposed to escape that one?
And in case there are any Greeks reading this thinking it is normal to pay tax on food, this is how it works in the UK
Food and drink, animals, animal feed, plants and seeds
Food and drink for human consumption is, in general, zero-rated but many items are standard-rated, including alcoholic drinks, confectionery, crisps and savoury snacks, supplies of food made in the course of catering including hot takeaways, ice cream, soft drinks and mineral water.
Because certain food and drink is zero-rated, so too are certain animals and animal feeds, and plants and seeds – if the animal or plant in question produces food that is normally used for human consumption.
There is no way the Greek crisis can end well.
There will come a point when people simply can’t pay their taxes and then what?
Not only will the Greek government have turned one of the most law-abiding countries in the world into one of the most “criminal” (although I wonder what jury would convict anyone for being unable to pay taxes which they themselves cannot pay), the Greek government will have also ensured the complete collapse of the private economy, with the only saviour coming from bail outs of the government.
The ECB and the EU are clearly not helping the Greek people in any way and the Reuters article shows that Greece, going on experiences with other countries defaulting, Greece would have been far, far better off if the country did not receive a single penny of bail out money.
It is a shame that this way of thinking is not obvious to the powers that be.
The bail out of the Greek government was for one purpose only and that was to give it time to balance its budget.
The only way the Greek government has thought this possible is to levy utterly barbaric taxes on its citizens and for this reason Greece would have been better off defaulting and balancing its books immediately. The proof of this assertion is in the Reuters article.
You could argue, as does the Reuters article, that the pain the bail outs are supposed to be stopping are actually worse than an actual default.
Let me repeat.
The pain caused by the bail outs are worse than the pain of a default. The default they are supposed to stop.
So why is the Greek political class so determined they need the bailout money.
Politicians are supposed to represent the interests of the people. Past experience has shown a default is the best way forward, Greek politicians are derelict in their duty not allowing the government to default.
There is no evidence to show that receiving bail out money is in any way a good option. There are no past examples which show that a default is worse than an IMF bail out NONE.