Sean O'Grady: Greek rage will remind many of a spoilt child's tantrums

The principal weakness seems to be the inability of the state to collect taxes among the middle classes and the elite

Saturday 22 October 2011 23:15

A tax on smoking rooms is just one of the emergency measures proposed by the Greek government in its third austerity programme in just over a year. Other tax hikes and spending cuts include: a rise in VAT in restaurants and bars from 13 per cent to 23 per cent; a duty on soft drinks; a freeze in the basic state pension; cuts in public-sector pay of up to 15 per cent; cuts in health and defence spending; abolition of free distribution of newspapers; higher taxes on cars; new taxes on yachts and boats; and cuts in disability benefits.

Overall, the government is aiming to reduce the budget deficit by about 3 per cent of Greece's national income in the next year or so, rather faster than George Osborne wants to see the UK's deficit decline. Some 82,400 state workers in Greece have been sacked.

Yet both nations face the problem that severe austerity packages can, in the short term, push government borrowing up, as the economy slows with cuts and as employment and tax revenues suffer. In Greece, tobacco and tourism are huge earners, and higher taxes on going out and on smoking may prove self-defeating – even if they appease the German caricature of lazy Hellenes smoking and sleeping their way to national oblivion in sunny tavernas.

A moderate programme of privatisation is also under way. The Hellenic National Horseracing Corporation is due to be sold off, along with Greece's aeronautics industry, the capital's buses and metro, and the national railways.

The principal weakness for Greece, however, seems to be the inability of the state to collect its taxes, especially among the middle classes and its elite, traditionally associated with the shipping trade.

The European Union/IMF/ European Central Bank "troika" of officials who have been in residence in Athens more or less constantly over the past year have politely but unmistakeably made clear their frustrations in this regard. It lies at the root of Greece's excessive indebtedness. The UK's debt to national income ratio will peak at about 75 per cent in a couple of years; Greece's is set to hit 160 per cent. Given an average interest rate on her debt of about 8 per cent and a growth rate way below that, the real-terms burden of debt is unsustainable.

In the good years, under the euro, Greece was able to borrow at cheap "German" rates of interest, which was easier than bothering to collect taxes; that option no longer exists and a decade of lost taxes has to be recouped.

However, some of the policies announced last year and now, supposedly as assaults on the Greek way of life, raised eyebrows across Europe. Few knew of the Christmas, Easter and summer holiday bonuses in the public sector, known as 13th and 14th salaries, which were abolished for those earning above €3,000 a month (£2,700) and capped for those on €1,000 euros or less. Only now is the working week for Greek public employees being raised from 37.5 to 40 hours.

For many in northern Europe, the rioting in Athens must remind them of a tantrum by a spoilt child.

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