A VERITABLE revolt by ruling party MPs and opposition pressure prompted Finance Minister Yiorgos Papakonstantinou on June 15 to revise a “poll tax” on virtually all salaries and pensions branded as “solidarity contribution” for the country’s growing number of unemployed.
The new tax was part of the government’s midterm plan for sweeping deficit-cutting measures worth 6.5 billion euros of additional savings this year and a total of another 22 billion euros in cutbacks for the 2012-2015 period, in accordance with Greece’s obligations agreed with the troika of EU-IMF-ECB creditors earlier this month.
The plan also calls for the privatisation of state assets and sale of public property to raise additional revenues of 50 billion euros.
The government’s first draft of the midterm plan was unveiled on June 10, before being submitted to parliament for preliminary assessment by the house economic committee.
Under this first draft, the annual tax-free income allowance would have been either lowered from the current 12,000 to 6,000 euros, or abolished altogether. Combined with the new poll tax proposed of a 1 to 4 percent scale on incomes declared in 2010, the reduced tax exemption would hurt the disposable income of underpaid workers and pensioners.
“We have a choice between a difficult path and a path of catastrophe,” Papakonstantinou told reporters on June 10. “We must fix what’s wrong or this country has no future.”
But the protest of Pasok deputies forced Papakonstantinou on June 15 to retreat from his earlier announcements and retract the planned abolition or reduction of the income tax exemption. By restoring the tax-free ceiling of 12,000 euros, the new taxes would cover income brackets above that level, leaving the lowest wages and pensions unaffected by the new measures.
Poll tax brackets
The new income brackets for the solidarity tax, still on the books, are as follows: annual incomes between 12,000 and 20,000 euros would be taxed with the 1 percent levy; between 20,000 and 50,000 euros with 2 percent; between 50,000 and 100,000 euros with 3 percent, and all income above 100,000 euros annually would be taxed with the 4 percent levy.
The government is hoping to recuperate the potential earnings shortfall from the repeal of the tax exemption by raising the amount of advance tax employees hold from salary payments to employees.
Another retreat from Papakonstantinou’s earlier version of the midterm plan was his decision to put off raising the excise tax on heating fuel to match that of car petrol. Originally due to be enacted in October, the move would have effectively raised the cost of heating fuel in an average household by 50 percent.
Budget cutbacks in public sector agencies are also being pursued while raising the fiscal burden on corporate dividend and housing property valued more than 100,000 euros.
The new wave of austerity in the midst of deepening recession and rising unemployment was meant to secure the troika’s continued disbursement of quarterly instalments from its 110bn euro rescue loan and the likelihood of providing additional funds to Greece in 2012-2014.
But the budget targets remain ambitious, as they are estimated to raise tax revenue by at least 2.45 billion this year, with additional tax revenues of 2.88 billion euros in 2012, 450 million euros in 2013 and 300 million in 2014.
Additional sources for these revenues include higher property taxes, legalisation fees for unauthorised buildings, a VAT rate hike on restaurants and bars to 23 from 13 percent, higher excise taxes on soft drinks and natural gas and luxury levies on yachts, pools and cars. To placate the conservative opposition, Papakonstantinou said he may cut VAT and corporate taxes in September.
The renaming of the new tax levies as “solidarity aid” or “reduction of tax exemptions” reflected the need for drastic fiscal steps necessitated by a continuing shortfall in tax revenues.
For the fifth consecutive month, the finance ministry in May has missed its deficit-cutting target by over a billion euros as the deficit is widening by an annual 13 percent rate compared to that of the first five months of 2010.
The January-May deficit was 10.27 billion euros compared with a target of 9.07 billion euros, due to a revenue shortfall of around 2 billion euros or 11 percent below target, due to a deeper than expected recession.
Net public expenditure (before interest payments) increased 4.3 percent to 21.29 billion euros, compared with a target of 19.92 billion euros, despite cuts in public investment of 47 percent year-on-year.
Output contracted at an annual rate of 5.5 percent in the first quarter and despite troika forecasts revised downward to a 3.8 percent decline for the whole of 2011. Some experts predict the recession could be deeper this year than the 2010 rate of -4.5 percent.
The midterm plan estimates public payroll savings to reach 800 million euros in 2011, 660 million in 2012, 398 million in 2013, 246 million in 2014 and 71 million in 2015.
The new reductions will arise from lowering the public hiring rate (1 new recruit for every 10 retirements in the civil service), by wage benefit reductions and by laying off or not renewing contracts this year for 50 percent of all public sector workers under temporary or short-term contracts.
Additional savings of around 1 billion euros per year will come from a reduction in social benefits (including unemployment pay) for means-tested “wealthy” beneficiaries, people who have alternative sources of income such as rents.