Dátum: 18.07.2013
The article was published on INEKO eTREND blog website on 11th of March 2013
Drawbacks are apparent mainly in privatization and also in the reduction of pensions and severance payments.
Slovakia financially assists a number of indebted EU states. The public should therefore be given information on how things are changing in those countries. Slovakia should also actively join the discussion on what further changes are necessary to achieve sustainability of public finances and strengthening their competitiveness. Transforming the overly indebted countries into competitive and prosperous economies with sustainable public finances is in fact crucial to the effective use of investment, which is in the form of financial assistance to the failed states from involved members of the euro area, including Slovakia.
Following the financial assistance from 2010 and 2012 Greece is committed to consolidate public finances and to implement economic reforms. Parliamentary elections in June 2012 have held the reforms back. Although the report of the European Commission assesses the country’s reform efforts generally positively, the problem remains a high risk for the implementation of reforms in case of further political turmoil. The report evaluates the implementation of the 13 priority areas and 276 objectives, of which 189 (68%) were fully implemented, 31 (11%) partly implemented and the remaining not implemented.
Thanks to pressure of the Troika (European Central Bank, International Monetary Fund, European Commission) Greece is undergoing radical reforms since 2010 after decades of stagnation, which significantly improves the prospects for its competitiveness. However, the austerity measures contributed to the prolonged and deeper recession lasting from 2008. In 2012 the Greek GDP fell by 6.3% and is expected to fall by 4.2% in 2013. The public debt peaked at 170.6% of GDP in 2011 and fell to 156.9% of GDP in 2012 thanks to the 75% haircut of private debt. The unemployment rate rose from 7.7% in 2008 to 24.3% in 2012. Greece has reduced its structural primary budget deficit by around 15 percent of GDP between 2009 and 2012 mainly thanks to radical reduction of expenditure on pensions, healthcare, and public sector wages.
Here is an overview of the most important changes:
Pension Reform: Repeal of the 13th and 14th retirement pensions, decrease in the pensions above 1,400 euros (concerns about 10% of retirees) by an average of 8%, the extension of the minimum retirement age to 60 and the normal retirement age to 65. Before the reform, employees in the public sector normally retired at age 55 in the private sector at age 60 mainly due to the use of early retirement. Other changes include binding minimum and normal retirement age to life expectancy and the introduction of indexation of pensions to inflation rather than to growth of average wages in the economy. A second wave of reforms was approved in 2012, namely the reduction of pensions by 5% for pensions from 1000 – 1500 euros, by 10% for 1500-2000 euros, by 15% for 2000-3000 euros, by 20% for 3000 to 4000 euros and by 25% over 4000 euros, extending the retirement age from 65 to 67 years, as well as the introduction of merit – strict binding of pensions to the amount of social contributions paid.
Public administration reform: Repeal of the 13th and 14th salaries in 2010, reducing salaries by 20% since November 2011, decline in the number of government employees in the years 2011-12 by about 80 000, while in 2015 the number of government employees is expected to fall by further 70 000 (according to Eurostat, 1.228 million employees worked for the public sector in 2008). The decline was mainly due to the rule applied since 2010 that only one person can be given a job for every five people leaving the public sector.
Improving the business environment: Greece has improved by 11 places and jumped to 78th place in the World Bank’s Doing Business 2013 ranking, making it one of the ten best climbers. Improvements were apparent in the categories of investor protection, paying taxes, foreign trade and the bankruptcy conditions.
Labor market reform: Lowering the minimum wage which, according to Eurostat, fell in 2012 from 877 euros to 684 euros, i.e. from about 50% to 39% of the average wage. Wages in sectors with collective bargaining decreased by about 20% in 2012, which is unprecedented in the EU and the developed world.
Tax Reform: Increasing taxes on tobacco and gambling, increasing taxes on interest from 10% to 15%. Repeal of special tax regimes (e.g. for farmers and fishermen), tax expenditures and concessions (e.g. for self-employed and so called “Professional” occupations, for mortgage interest payments, payments for life insurance, student expenses, etc.). Previous overall child tax benefits began to be tested by means, i.e. income and assets (means testing). Profit tax for companies increased from 20% to 26% and the dividend tax was reduced from 25% to 10%. Thus, the effective tax on corporate profits has been reduced from 40% to 33.4%. Tax progressivity has been maintained, but instead of eight tax brackets the new tax reform introduces three, increasing so called tax credit that makes the tax burden on low-and moderate-income households intact (about 1 million workers and retirees will pay no tax).
Health Care Reform: Introduction of one of the most advanced electronic prescription systems in Europe which is used to prescribe more than 90% of medicines. The system enables real-time monitoring of the health insurance company expenses on drugs, prescriptions of drugs by specific doctors and their issuing by pharmacies to specific patients with a given diagnosis. They can thus help to detect possible fraud, check the adequacy of the prescribing drugs for a given state of health of the patient and improve overall control and management of drug expenditures. Mandatory prescription of active substance (called generic prescription) as well as mandatory generic substitution of medicines in pharmacies (i.e. it is mandatory to swap expensive medicines prescribed for cheaper ones) was introduced in March 2012, drawbacks are still in compliance with these measures. Patient fees for drugs have been expanded (except for specific medicines); referencing drug prices by three EU countries with the lowest price has been introduced. A web application has been established that allows real-time registration and control of all major activities and financial flows in hospitals.
Education: The closure of small schools is continuing; about two thousand schools have been cancelled.
Judiciary: The priorities are the creation and dissemination of statistics on the activities of the courts, the introduction of electronic submissions to the courts (e-justice applications), reducing the number of lawsuits pending, in particular the ones on paying taxes, promoting amicable settlement of disputes and judicial review of the Code.
Energetics: In November 2012 parliament approved a temporary tax (solidarity contribution) on the revenue from the sale of electricity produced from renewable energy sources (mainly from solar panels), which were previously favored. Full market opening and final release of electricity prices was presumed for mid-2013.
Telekom: In order to enhance competition in the wireless communications market frequencies in the 800 megahertz band are being released (so called digital dividend) and the digital television is launching.
Shipping: In order to strengthen competition, license facilitation of road freight and occasional passenger traffic has been simplified. In early 2012 due to restructuring, the economic results of several state companies, such as rail transport, have been balanced. Privatization of these companies is being prepared.
Retail: In the first half of 2012, the Government abolished the ban on selling goods below their cost price.
Social benefits reduction: Addressable targeting of low-income households (replacing various family benefits with only one benefit, based on means testing), reduction of benefits to farmers, abolition of seasonal benefits for people working in seasonal industries, limiting subsidized transport for patients.
Municipalities: Reducing subsidies for regional government (220 mil. euros in 2013-14), the obligation of balanced budgets, monitoring of economic results, and penalties for deviations from the plan.
Defense: Decreased defense spending in 2010 by 1.2% (to 2.2%) and in 2011 by a further 0.5% of GDP.
Fight against corruption: Increased use of e-procurement at central and regional level. The Economist writes that hundreds of people have been arrested in the fight against tax evasion, including several influential Athenian entrepreneurs.
Despite progress in reforms there are downsides in Greek economy. Disappointing is the pace of privatization, as mainly due to political instability that occurred from December 2011 to November 2012 no transactions have been completed. Due to delays in the privatization, revenues estimate was decreased from 24 billion euros in 2016 to less than 8.5 billion euros. The situation has not changed until September 2012, when the government announced several privatization tenders.
Compared with expectations markets for goods and services liberalization is also lagging. Reduction in the severance pay to a maximum of 12 months’ salary as well as in the notice period to 4 months might prove insufficient. Reduction in pensions up to 1,000 euros represents another scope for savings not only due to the need for consolidation but also because of the need to spread the consolidation on all voters in order to reduce future preference for populism in politics. Further savings may be achieved by reduction in subsidies to pay excise tax for fuel for farmers, which dropped from 95% to only 80% of the tax. Hot candidate for cancellation is also a special pension fund for employees of the Central Bank, “social” contributions to pension contributions for engineers, journalists and lawyers, as well as many other privileges for so called regulated professions.
In order to make the highest return on investment, which Slovakia participates in via the rescue mechanism for Greece, our leaders should call for a continuation of reforms with an emphasis on areas where the greatest lags appear. In order to better inform the public about ongoing changes in beneficiaries’ countries, Slovakia should require regular disclosure of a clear and detailed comparison of indicators of competitiveness of these countries. Compared to the current state, the public should not only receive reports for individual countries, but comparison of reform measures and competitiveness indicators for all countries benefiting from assistance. Description of measures should be detailed, it should, apart from others, include a schedule of retirement age extension, or the length of the severance pay and notice periods before and after the reform for each relevant group of employees.
Peter Goliaš, INEKO