No reforms, big or small, just handouts

In a way, inflation can do a certain amount of “magic.” First of all, it increases nominal gross domestic product and thus improves the debt-to-GDP ratio. Secondly, since so much of our debt is at fixed rates, inflation eats away the real cost of servicing it, so we will save about 15 billion euros this year. And, thirdly, it increases public revenue mainly through indirect taxation. Thus, it would not be difficult, instead of a primary fiscal deficit, to achieve a primary surplus this year, while we may even come close to zeroing out the deficit at the end.

Things will become much more difficult in 2023. From an increase of around 6% this year, GDP will rise by 1.8% (according to the International Monetary Fund) or 1.6% (according to Greece’s Foundation for Economic and Industrial Research, IOBE) in 2023. These are percentages which – IOBE estimates – may be reduced to zero if the international environment worsens and, above all, if Greece lags behind in investments. This is because, until now, the engine of growth has been consumption: As statistics service ELSTAT tells us, retail turnover in the second quarter of this year was up 39.3% from last year and 35% from the same quarter of 2019. This means that government money was the driving force in the market, as well as in the banking sector, in the form of increased deposits.

In general, the increase in GDP in the last two years was not the result of major reforms (the economic plan recommended by Nobel Laureate Sir Christopher Pissarides and economist Nikos Vettas has been confined to the dustbin of history) nor due to an investment boom – although the business climate has significantly improved. The rise in GDP was funded by the state – or, more precisely, the Greek taxpayer.

This is what the numbers show: From 165 billion euros in 2020, GDP rose to 183 billion euros last year and is forecast to reach around 200 billion this year. To climb from 165 billion euros to 200, more than 56 billion euros were distributed in the last two years in the form of benefits and allowances.

So, we have a larger GDP (around the levels last seen 10 years ago), but it is enlarged at a great cost, reproducing all the traditional structural weaknesses of the economy – which are reflected in the external balance of goods and services – and with a deterioration in its quality, since state money is not really new wealth.

To begin with, that’s hardly what you would call a success. Secondly, consumption is running out of steam, as shown by the leading indicator of turnover in basic necessities; it is actually decreasing. Thirdly, many businesses are hitting the brakes: in many companies pre-tax and interest profits are half of what they were last year or even lower, investment plans are frozen until it becomes more clear where things are going and banks are worried about a new generation of bad loans. And, fourthly, a climate of complacency is being cultivated – that there is money available, that the state has plenty to spend.

So what is the minimum one would expect from the government? That, in conditions as difficult as today’s, prudent fiscal management would take care of public revenues. Instead of overburdening the usual suspects, it would reform the tax system to make it less hostile to salaried labor, more modern and efficient, and finally, it would declare war on tax evasion. Greece has the third highest value-added tax rate in Europe but it is 15th in terms of VAT revenue in relation to GDP. It ranks second in lost revenue while uncollected VAT reaches around 5.4 billion euros per year. Greece is also in the last places in Europe in terms of electronic payments as a percentage of private consumption and well below the European average in the use of credit and debit cards.

Dealing with these problems, however, is not among the government’s priorities. It wasn’t in the past three years and it is even less likely to be so now – it does not want to disappoint voters before an election.