THE GREEK government says it will effectively axe one in 14 annual salaries from the public payroll and raise VAT as part of an ongoing effort to cut its budget deficit by four points in 2010.
Public servants have gone on strike twice this year, complaining that a 10 per cent cut in their benefits already amounted to the loss of one salary. Yesterday those benefits, which can sometimes double nominal salary, were cut by a further two percentage points. Pensions are being frozen.
Greece has pledged to bring its deficit to 8.7 per cent of GDP in 2010 and was under pressure from the European Union in recent days to make good a €4.8 billion shortfall in its initial plan.
Half of the pain is in public-sector cuts, but the other half is in new revenue. This comes in part from higher value added tax, the top bracket of which now rises from 19 to 21 per cent. Inflicting further pain on household budgets will be a 10 cents a litre hike on unleaded fuel, a 65 per cent consumer tax on cigarettes and a further tax hike on alcohol. Even electrical power will suffer a fee of €5 per megawatt hour.
Preparing public opinion for the latest tranche of measures on Tuesday, prime minister Yiorgos Papandreou said: “We are today in a state of war against the worst-case scenario for our country.”
That scenario, by his description, was a cost of borrowing so prohibitively high that the state would be unable to pay salaries and pensions, which represent 52 per cent of its outlay. “Today, when we borrow €5 billion, we pay €750 million more than Germany does in interest,” Mr Papandreou said. “How can we ever compete with the German economy?”
He is facing increasingly stiff opposition at home, however. These measures would deepen the recession, said conservative leader Antonis Samaras, who rejected the salary cut and VAT and fuel tax rises. He accused Mr Papandreou, who came to power in October, of waiting five months to cut the cost of government.
If he had acted sooner, he said, the cuts would have been softer and less painful. The government’s indecisiveness was expensive.
The governing council of the European Central Bank (ECB) and European Commission chief José Manuel Barroso backed the new measures, each of them underlining the importance of public-sector pay cuts.
In a statement last night, the ECB’s policy-making body said it welcomed the “convincing additional and permanent” measures and said it appreciated that Mr Papandreou’s administration planned to implement them very swiftly.
“Importantly, cutting public expenditure and adjusting public sector wages is a key signal both for the long-term fiscal sustainability and for substantially enhancing the price and cost competitiveness of the Greek economy,” the council said.
Read the full version of this story in The Irish Times.
The full tranche of yesterday's measures is as follows:
1. New revenue
- VAT (or sales tax) rises from 4.5 percent to 5 percent, from 9 percent to 10 percent and from 19 percent to 21 percent, to bring in 1.3 billion euros.
- A series of consumer taxes aim to bring in a further 1.1 billion euros, including:
- 8 cents on the litre for regular unleaded fuel, and 3 cents for diesel (heating oil remains as is)
- Tax on cigarettes rises from 63 percent to 65 percent
- Tax on alcohol rises to 20 percent
- The Public Power Corporation loses its exemption from tax on oil, and a new consumer tax is levied on electric power
- Cars with a retail value above 35,000 euros, pleasure craft, private helicopters, precious stones and metals and furs and leather will sustain a new luxury consumer tax
Total new revenue: 2.4 billion euros
2. New cost cuts:
- Public sector Easter, summer and Christmas bonuses are cut by 30 percent. These three bonuses amount to two monthly salaries, so public servants lose 60 percent of their 14th salary.
- Benefits above salary to public workers are cut by 2 percent, further to the 10 percent cut announced last month
- The salaries and benefits of all employees working in state-owned or state-controlled companies is cut by 7 percent across the board
- Pensions are frozen
- The state will reduce its outlay to the pension funds of the Public Power Corporation (DEI) and the Hellenic Telecommunications Organisation (OTE) by 10 percent
So far, the measures save 1.7 billion euros.
- The public investments programme is cut by 500 million euros
- The public investment programme in education is cut by 200 million euros
Total savings: 2.4 billion euros
Key 10-year bond sale goes well
Greece's sale of a 5 billion euro bond issue was going well on Thursday, a day after the austerity measures were announced, with the FT reporting an oversubscription of 2 billion euros.
Ireland overhauls pensions radically
Ireland has just announced an overhaul of its pension system that includes many of the ideas currently being discussed in Greece. The retirement age will rise to 66 in four years' time, and eventually to 68. Pensions will be calculated on average career earnings, not just the last few years of work. And young entrants into the labour market will be obliged to participate in a second pillar scheme in the private sector, where they will contribute four percent of salary, their employer two percent and the government two percent.While the state pension plan will remain a defined-benefits plan, with the state guaranteeing 35 percent of average industrial earnings, the private scheme will be a defined-contribution one where benefits may fluctuate according to fund earnings.
Read the full story in The Irish Times.