Is Greece relying too much on taxes to adjust?

Following the debt crisis of 2009-2010, Greece is currently undertaking a large fiscal adjustment. This adjustment can occur either by cutting spending or by increasing tax revenues. I present evidence from the successful experience of several European countries that went through similar adjustments to examine how the composition of the fiscal adjustment (cutting spending vs. increasing taxes) affects macroeconomic performance and the likelihood of reducing fiscal imbalances. The conclusion is that most successful adjustments typically rely much less on taxes than the proposed Greek fiscal adjustment and that Greece would benefit from lowering taxes and cutting spending even more. In addition, the experience of countries that undertook large fiscal adjustments suggests that governments cutting spending had no problem getting reelected as the improved economic performance helped them gain popularity.

This article has been written by Loukas Karabarbounis. The full article here.

About L_Karabarbounis

University of Chicago

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3 Responses to Is Greece relying too much on taxes to adjust?

  1. Moschge says:

    Alecos is right. There is no doubt that fiscal consolidation driven by expenditure cutting and to a lesser extent, by revenue enhancing measures, has been proven to be succesful and sustainable. The size of the public sector however, and the lack of detailed fiscal data, makes it trickier in Greece, than one would imagine.
    a. The sum of public wage bill and interest expenditure in Greece was 17.5% of GDP, while the euro-area average stands at less than 13.5% of GDP in 2009….. the gap in 2010 is estimated to widen.
    b. For a thorough and detailed investigation in other expenditure categories for possible cuts, a credible and wide in scope set of fiscal accounts is necessary, in both national and sub-national level. The current budgetary accounts, even for the state-level, do not provide sufficient information…. not to mention local governments, extra-budgetary funds and social security accounts.
    Proper data collection and processing is a prerequisite for a succesful and sustainable public spending cuts policy, which however might take some time to materialise….. some first important steps have already been taken (ie. the public employment census) and others are in the pipeline.
    c. To know what to cut, must know what and how has been spent (not the amount but the actual purpose of the spending)… this might not be always the case in Greece.

  2. Alecos Papadopoulos says:

    I support the position that we should rely more on spending cuts than increased tax revenues, because, among other things, what our public sector has been proven deplorably incapable of, is spending wisely. So increasing tax revenues increases the risk of renewed fiscal waste, let alone the low probability of achieving the set targets. That there are hard macro-data indicators to back this up, it’s a good thing.
    But spending cuts need to be not just decided, but planned.
    For example, nobody really knows if the public sector employees more people than it needs to (given the current bundle of services), because there are spectacular personnel surpluses in some dpts and spectacular personnel shortages in other dpts.
    More over, we need a society-wide consensus on what the level of wages in the public sector should be relative to the private sector. My position is that public sector wages should systematically trail private sector wages by a margin that would reflect the risk of employment fluctuations and unemployment that employees in the private sector bear, and which, by social design, is essentially absent in the public sector. In other words, for comparable efficiency/accountability strata, lifetime income in the public sector should be equal to the expected lifetime income in the private sector given the probability of unemployment spells, .
    Finally, before we initiate cuts across-the-board, risking low-quality due to underfunding in all areas of public services, perhaps we should choose to shed completely some services in order to preserve and increase quality in the indisputable (like law, order, and external safety) and core social ones, like education and health.
    Alecos Papadopoulos

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