"BBC News" - Greece Needs More Cuts Not Higher Taxes, Says IMF

Published on Monday, September 19, 2011 by BBC News

http://www.bbc.co.uk/news/business-14969034

The International Monetary Fund (IMF) has told Greece it needs better tax collection and deeper spending cuts, not higher taxes, to avert its crisis.

The warning comes ahead of Greece's talks with the IMF and European authorities about whether it is doing enough to receive crucial funds.

Greece is trying to persuade them to release the next 8bn-euro (£7bn, $11bn) instalment of its EU-IMF loan.

It needs this money by next month to avoid defaulting on its debt.

The loan comes with the condition that Greece dramatically reduce its deficit, something that it plans to do by cutting the size of the state sector through redundancies, pay cuts and privatisations.

The IMF representative for Greece, Bob Traa, who is in Athens, said this was of crucial importance: "The public sector is very large. Another central element in our view must be to reduce public sector spending.

"This will inevitably require the closure of inefficient state entities as well as reductions in the excessively large public sector workforce and generous public sector wages, which in some cases are above those of the equivalent private sector workers."

Property tax

Greece is also proposing an emergency property tax, to be paid through household energy bills.

However, Mr Traa said this was not a good idea.

"In our view, you should not be drawn to higher and higher taxes on the limited tax base," he said. "This will neither be economically or politically sustainable."

He said a more efficient tax system would be more helpful and called for a "much stronger resolve to tackle the problem of tax evasion".

"Greece cannot achieve the consolidation through spending cuts alone.

"The increase in revenues... must come from improving collection rather than by increasing or by introducing new taxes."

The chairman of the Athens Chamber of Commerce, Constantine Michalos, said the danger from new taxes could be social breakdown.

"In periods of recession the imposition of new taxes aggravates and increases unemployment, and if we reach the 20% unemployment level then economically there is an imminent risk that social cohesion will explode," he said.

European finance ministers also told Greece last week that they doubted the property tax would be successful and that more cuts would be more effective.

Already, some state electricity company trade unionists have said they will refuse to collect the taxes.

The BBC's Europe editor, Gavin Hewitt, says nearly 15% of people are already behind on their utility payments.

He says: "That will surely go higher with the new tax needing to be paid next month. The threat is that if you don't pay, then you'll be cut off."

Mr Traa also praised Greece's efforts, but said it would need more time for implementation: "I think that Greece deserves credit for [its fiscal progress] under the programme so far."

He added: "One critical thing we have learned it that it is going to take more time because the implementation capacity in Greece is limited."

Deeper cuts

According to an apparent email to the Greek government and published by an Athens newspaper, the Troika of the EU, European Central Bank and IMF have listed 15 measures to be implemented.

These includes demands that Greece make 100,000 employees in state-controlled companies redundant, which is 20,000 more than previously planned.

The continuing crisis has again unsettled financial markets, with share markets in Europe and the US down by more than 2% on Monday.

Earlier, the country's Finance Minister, Evangelos Venizelos, said European and international institutions were using Greece as a "scapegoat" to "hide their own lack of competence to manage the crisis".

Mr Venizelos will be taking part in the teleconference later this afternoon with European Union (EU) and International Monetary Fund (IMF) officials.

In a statement, Mr Venizelos also said that Greece had been "blackmailed and humiliated".

He said that to stop this situation, the country had to move ahead with its deficit reduction work so it could meet its financial targets.

Mr Venizelos said: "If we want to stabilise the situation... we have to make three large strategic decisions as part of our national strategy."

The three strategic decisions he highlighted were:

• Greece achieving its 2011 and 2012 fiscal targets
• Achieve annual budget surpluses "as soon as possible"
• Carry out structural changes to allow Greece to become more competitive and productive

'Negative stereotype'

The EU and IMF agreed 110bn euros of bailout funds for Greece in May last year.

A further 109bn euros was provisionally agreed in July this year, but this still needs ratifying by a number of parliaments in eurozone member states.

On Sunday, the Greek government held cabinet crisis talks over what new austerity measures to put in place to help secure its next EU-IMF loan instalment.

It had been due to get the go-ahead to receive 8bn euros this month, but eurozone leaders delayed the decision until October following concerns that Greece was not doing enough to reduce its spending.

Mr Venizelos, also urged groups in Greece opposed to the government's spending cuts to stop their criticisms, saying they created a "negative stereotype" which undermined the country's credibility.

He said: "This cannot go on. Those of us with a public standing, whether they are politicians, journalists, analysts, entrepreneurs, academicians, must have in mind that what they say can be used as arguments against the country."

Mr Venizelos went on to single out Greek opposition leader Antonis Samaras, saying Mr Samaras had "no idea" what the country faced.

Mr Michalos said it was vital politicians got a grip of the situation.

"At the moment we are under the markets," he said. "The markets are ruling not the government and therefore there has to be a political solution at some point otherwise it could be doomsday for the whole of Europe."