Wednesday, March 3, 2010

Greece continues to take its medicine $EWG

As widely trailed in the media, the Greek government announced this morning a further package of fiscal measures to ensure that the Stability and Growth Programme objective of a fiscal deficit at 8.7% in 2010, down from 12.7% of GDP in 2009, will be met. This announcement is the Greek response to the concerns raised last week by a joint EC/ECB/IMF delegation, that questioned some of the assumptions in the original Greek Stability and Growth Programme, and has suggested the scale and composition of additional measures needed to make the plan more realistic.

As largely anticipated, the measures amount to an additional 4.8 billion (roughly 2.0% of GDP). Around half of this amount will come from an increase in revenues. In the first instance,one may hope that more of the adjustment would ultimately come through spending adjusting permanently downward rather than taxes rising, but the fact that it is easier to raise existing taxes quickly and have an impact on revenues adds immediacy and hence credibility to the plan. In more detail, there will be an increase in the standard VAT rate to 21%, from 19%, and further rise in alcohol and tobacco taxes. On the spending side, the main measure is a 30% cut in the three
extra monthly salary payments received by civil servants.


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