From The Economist, August 1, 2019
Over the past decade Greece has been a tough place for politicians who like to be liked. The newly elected centre-right government is trying its best. In his first few weeks in office Kyriakos Mitsotakis, the prime minister, has announced tax breaks for ordinary Greeks and corporations. He has promised not to cut social benefits or fire any public-sector workers. Jobs are being created in areas that suffered deep cuts during the country’s eight-year malaise. The health ministry is preparing to hire 2,400 hospital staff; another 1,500 police officers are being recruited.
Sadly, the good times are not guaranteed. The prime minister’s policy choices could derail Greece’s chances of hitting tough budget-surplus targets set by its creditors, the eu and the imf. Economists fear that the relatively inexperienced Mr Mitsotakis—he held a fairly junior ministerial post from 2013 to 2015—may be overestimating his government’s capacity to shake up the country’s sleepy bureaucracy and push through reforms.
So far the markets have smiled on Mr Mitsotakis and his New Democracy. On July 16th Greece issued its first seven-year bond since 2010. A modest target of €2.5bn ($2.8bn) issued was hugely oversubscribed: offers exceeded €13bn, pushing down the yield on the new bond to 1.9%.
Winning over the eu and the imf will be harder. Asked about the new Greek government at her annual summer press conference, Angela Merkel, the German chancellor, called the bond issue “very positive” but sounded a note of caution: “We will have to see how things evolve.”
Mr Mitsotakis’s eagerness to accelerate growth by cutting taxes as fast as possible is risky. In his first policy statement in parliament on July 21st, Mr Mitsotakis announced an immediate 22% cut in “enfia”, an unpopular annual property tax, and a cut of four percentage points in corporate tax to 24%. Both measures will take effect in September, four months earlier than originally expected. The income-tax rate for the lowest bracket will fall from 22% to 9%; value-added tax will drop by two percentage points. Further cuts will follow in 2020, Mr Mitsotakis says.
He has also made it clear that he will not broaden the tax base, a long-awaited reform that Syriza reneged on last year. Miranda Xafa, a former imf economist, points out that seven out of ten Greeks pay less than €100 a year in income tax. Getting more people to pay tax “would help pay for the tax-rate cuts and make burden-sharing fairer”, she says.
The prime minister nonetheless promises that Greece will stick to a harsh budget target this year and next. This target has already been agreed with its creditors: a primary surplus (before debt-servicing costs) of 3.5% of gdp. The Syriza government of Alexis Tsipras, Mr Mitsotakis’s predecessor, exceeded this target last year by raising taxes and cutting the public-investment budget. Creditors were impressed by Syriza’s rigour, but growth was subdued. This year’s forecast is around 2%, well below the 3.5-4% needed to make up for the recession quickly. Greek gdp is still about 25% below its pre-crisis peak.
The new government hopes that political stability (thanks to its majority in parliament) and business-friendly reforms (cutting red tape as well as taxes) will attract foreign investment. “Greece will be a totally new country for business,” promises Adonis Georgiadis, the minister for development and investment. As a sign of seriousness, he is leading a push to make sure the long-stalled privatisation of Hellinikon, a prime site that used to be Athens’s airport, gets under way this year.
The government will present a draft budget in September. Although Greece is no longer in an official rescue programme, the budget must be approved by the creditors under the terms of a post-bail-out “surveillance” agreement. He is betting on drastic cost-cutting at government ministries to offset immediate revenue reductions from tax cuts. Good luck with that.