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Deficit reduction, Greek style

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Paul Mason | 16:44 UK time, Tuesday, 20 July 2010

Six months on from the shock of finding out the country's deficit was twice the size previously reported, the Greek government has today published the results of its deficit reduction actions. These make interesting reading, and provide a new case study to add to the various Canadian and Swedish examples touted around by pro-Coalition think tanks.

The Greek government is by no means out of the mire - but it is slashing its deficit faster than promised and by two simple expedients. It is collecting a lot more tax and spending a lot less money, immediately.

And from the evidence presented today, it's not only the structural reforms of salary cuts and pension reforms to the public sector that have delivered immediate bottom line benefits: the government simply stopped consuming.

The Greek central government managed to raise its tax take by 7% and slash its spending by 12% compared to the first six months of 2009. As a result it has slashed its first half deficit by 39%.

This, of course, will be hard to sustain if the scale of austerity now tanks real economic growth. And hard to repeat here: with very little effort (and a metaphorical big stick) the Greek finance ministry has forced all those doctors and dentists whose annual incomes were supposed to be 30k Euros to get real and pay up. The New Economics Foundation estimates there's a maximum of £50bn to be raised here from a total crackdown on tax evasion, but it would need more than just applying the existing law to the small fry.

The most eyecatching part of the Greek figures out today is the 52% fall in government consumption. This is staggering and has been achieved by an immediate reduction in two spending lines the Coalition government in Britain is unwilling to touch in the short term: health and social security.

One final point is, the May 10th bailout is also having a benign impact: instead of increasing by 5%, Greek borrowing costs actually fell by 13%. It's early days but this is the first case study of rapid deficit reduction: we've already seen the consequences in terms of social unrest; but the pain has only started.

Comments

  • Comment number 1.

    52% in UK Government consumption? That would be interesting. Let me day-dream for a moment.

    It seems to me that the difference between Greece and the UK is that the Greeks are actually doing stuff, doing things and all we have are Government Ministers talking about doing stuff, doing things.

    They talk a lot but they seem terribly short on action.

    I suppose this is because of the wacky 90 day consultation processes that go on in the British Public Sector - will we actually see any job cuts at all in 2010?

    It would be a shame if the Cameron/Clegg Coalition mirrors the Obama years - lots of hype, lots of 'Hope', all talk but no action.

    Would love to see all our Doctors who do ops 'on the weekend' get brought to book by the taxman. I wonder how many fees from 'knees' and 'hips' found themselves into second homes and buy to lets in the past decade or two?

  • Comment number 2.

    A downgrade or two on Uk debt may focus the mind somewhat. Given the impetus I am sure the 90 day consultations and ringfenced NHS may soon be compromised.

    I am guessing that Greece, like Spain, has a strong casual agricultural sector, so I guess people can carry on, grow a bit of food, have a few chickens, make a little wine when things get tough and their benefits get slashed.

    If the same thing happened here we dont have enough of the basic things we need to get by... no benefits = no food = big trouble (any society is only afew square meals away from chaos).

    And the weather is rubbish....


    Probably why we took Empire building option in the past..


  • Comment number 3.

    It would be intersting to see some per capita government spending figures for Greece and the PIIGS and the UK before and after the 'cuts'.

    Presumably, UK government per capita spending is much higher than that of Greece because of the higher costs of e.g. the UK defence budget and the difference in climate?

    If Greece and Ireland can 'do it' with the 'cuts' ... why not the UK?

  • Comment number 4.

    tawse57 - I'd quite like to see an increase in people who shirk a bit of tax after studying for a long, difficult degree and then working like a dog for years. This sounds like sticking it to those who are successful to me.

    I'm thinking it's not the root cause of the problem. Day dream this instead...

    How many government paper pushers, who have claimed overtime whenever they can, whose only skill is keeping their nose clean, will be leaving their big homes in the next year, increasing the suburban stock of housing for sale, thereby pushing down prices? I reckon this will have a bigger effect as there are plenty more civil servants than medical consultants!

    Let's get interest rates up while we are at it and get this sorry tale onto the next chapter.

  • Comment number 5.

    #4

    interest rates are 'up' in the real world, only banks get cheap money.

    I saw an add for 'pay day loans' from quick money.com (or something similar)on the TV, I was watching it really carefully to see when the mandatory APR popped up. Even then i nearly missed it at the bottom of the screen in large white letters, which just so happened to be part camouflaged by a chequered dress worn by a large bosomed lady.

    I kept my nerve and read it in the split second it was on screen.

    I cant be sure but it was definitely 4 figures, something like.

    APR typical 2196%

    I s*** you not.

    And for that they get you to sign a DD mandate for the day your pay goes into your account.


  • Comment number 6.

    I did not say that at all Ben. What a bizarre interpretation.

  • Comment number 7.

    #5 addendum

    just thought I would check my facts after my recent embarresment. I thought to myself ''a four figure APR ..surely that can not be right'' but....my memory has not failed me this time

    The site is actually called 'quick quid' (for whom !!!).

    Here are their interest rates as published on their web site an 'excellent'' APR is a mere 819%:


    Finance Charge1 Total Amount to be Paid to QuickQuid APR2
    Excellent £50.00 £10.00 £60.00 819.12%
    Good £50.00 £12.50 £62.50 1410.33%
    Average £50.00 £14.75 £64.75 2222.46%

    Beware of Greeks bearing gifts.

  • Comment number 8.

    tawse57 - ok if I got it wrong apologies. Not intended as a dig at you and I stay with the sentiment that it's the majority that are the problem not the elite minority. That isn't to defend them of course. Apologies if I offended!

    Not long until we enter stage 2a in October. 2b will be interest rate rises but who knows when that will start.

  • Comment number 9.

    Never mind Greek doctors and dentists on €30K pa...

    What about people that work at the BBC who are on over £150K pa and who don't pay much tax?

    What if I told you that a tax advisor can reduce your income tax burden to 22% on £150k a year - and the 22% includes the £7k fee required to pay for the service.

    I can categorically and with total certainty tell you this is true and happening now. the £7k fee prevents this measure being suitable for all tax payers - and the HMRC know this loophole exists but refuses to do anything about it.

    Footballers, entertainers, BBC newreaders/journalists, City contractors are all exploiting this loophole to it's fullest.

    So Paul, are you on a contract with the BBC or are you PAYE?

    Silence will draw only one conclusion.

  • Comment number 10.

    the govt should use the first year to do the hard choices. they should look at health and SS. labour failed to do the big things because before they knew where they were tony was on a crusade against iraq and their position in to country became fragile.

  • Comment number 11.

    #9

    Isnt the capital gains tax supposed to close that one or is this something else.

    Good question though..who at the BBC is PAYE???

  • Comment number 12.

    No offence taken Ben. I practice mindfulness meditation. I am hoping to be an MP oneday.

  • Comment number 13.

    Cutting the Deficit the Greek way.

    Tax take, issue increased tax bills and add the total of the bills issued to the total tax recieved so far and call it total tax income for the period. (ooh a 7% increase in the tax take)

    Spending cuts, cut public sector wages and pensions (done) query all invoices recieved, invoices under query are not added to the spending total until they are accepted. Dispute outstanding invoice totals by 10% and remove this 10% from the total spend.

    ie. overstate income expected and stop paying existing and future bills, suddenly the cash flow situation (deficit) shows a marked imporvement.

    It is however only a temporary improvement but it should buy them enough time to get past the bank stress testing and able to raise some cash to stop the lights going out before they get found out.



  • Comment number 14.

    jauntycyclist:

    here's the iraq timeline:

    http://news.bbc.co.uk/2/hi/middle_east/737483.stm

    First mention of Blair, 2002. IMHO Labour failed to sort out the NHS and SS because they are socialists who want to boost state spending thereby boosting their own hold on power. Labour did next to nothing in their first term, especially considering their majority. After that they borrowed like a group of people who don't care about the long term of the majority. To say Blair and Iraq is the root cause is not correct.

    By contrast so far the Tories do appear to be making significant changes, though I'll reserve judgement as so far it's just talk.

    ps when I get to work, after cycling through London's traffic, I get to a sign at the top of a slop to the underground car park warning me that I must dismount for my own safty. Then I get a shower: "warning, floor wet, you may slip". What a total waste of time. Anyone else remember before Labour? I do, and I hope socialists never ever get back in.

  • Comment number 15.

    #14 Ben

    You need to learn the difference between socialism & social democracy.

    The Labour government did all that it could to save capitalism by taking money from ordinary people & giving it to the banks - that's how socialist they are.

  • Comment number 16.

    Plenty of scope over here for dealing with tax evasion and avoidance - let it rip and if you are really serious go for a wealth tax.

    Of course if you cut transfer payments (HB JSA etc) you will get an immediate reduction in the spending of the govt but it is the medium term consequences of a large deflation of the economy that matters (which takes the form of impoverishing a significant sector of the population) and the effects on growth (or contraction) will take time. So it is premature to see the Greek approach as 'successful' Even if it is seen successful in its own terms where does that lead the Greek people in respect of their future economic prospects given that they are shackled to monetary system that suits the northern European style of economies?

    Is the Irish model successful too?

  • Comment number 17.

    It is far too early to draw any conclusions at the moment. It is easy to get a fast response at the start of any project like this as you are cutting into the soft tissue.

    Believe you me it gets a lot tougher later on once the easy cuts have been made. Particularly when you have to completely revise how the scoiety is to work.

    As others have said above a lot of new informal economic relationships will come into play. This will not be taxed as no money changes hands. I have to point out that such informality is the real socialism rather than the taxpayer subsidised petit-bourgeois sharp-elbowed madness promulgated as socialism by Labour.

  • Comment number 18.

    Up to 250 jobs, reducing the staff to about 890, are going to go from the Wales Economic Office. No forced redundancies - just people taking retirement, wastage and other packages.

    This is the first time I have heard any mention of this 'Office'. I run a business in Wales. I run a high-tech business.

    It transpires that it was responsible for the 'Techniums' - 10 centres set up around Wales to help turn Wales into a roaring high-tech Celtic dragon. Swansea has two - about a mile apart.

    New expensive buildings that, for a long time, stood mostly empty - I have no idea how full or empty they are nowadays. Rumour has it that in the end they were desperate to shoe-horn just about any business into them. But then there are always rumours when it comes to public money in Wales.

    Internal auditors have referred to a major risk of "loss, fraud, impropriety, poor value for money, a failure to achieve objectives". The internal audit raised "significant concerns" about the way the department was being managed. Technium is one of the main projects that appears to have caused concern for the auditors.

    I wonder if they have any Techniums in Greece?


  • Comment number 19.

    Sure enough the Greeks are making progress from a very dire starting point. The low hanging fruit like raising taxes on easy targets have been plucked from the tree. They may even bring the annual budget into balance and pay some of their debts - however, and this applies to UK Ireland and the USA too, they have done little if anything to tackle the fundamental economic (and cultural?) imbalances that created the problem in the first place.
    Is this politically too big an ask? Is this the inverse of moral hazard, a problem too big to solve (democratically)?

  • Comment number 20.

    #18 tawse57

    'I wonder if they have any Techniums in Greece?'

    ----------------------------------

    The word sounds Greek to me!

    Maybe Archimedes mentally exercised in one of them?

  • Comment number 21.

    #18 tawse57
    Techniums sound like a profoundly ill thought out waste of government money...however as you are someone who "runs a high-tech business" in Wales, what do you think the government SHOULD be doing (if anything) to combat rampant unemployment/non-participation in the economy and de-population?
    Would you leave that to the market to sort out, so that Wales becomes a wasteland, with peripheral businesses in agriculture & tourism opportunistically eking out a crust. Don't say reduce tax on business because nobody invests in a business purely because tax rates are lower.
    Wales' population is not so large that it needs an industry of any scale, but it can't sustain itself selling red dragon mouse mats to the tourists and farming the hills.

  • Comment number 22.

    £100 million spent on the 10 Techniums - allegedly, apart from some shiny new buildings, they are not sure where or how the money was spent.

    Allegedly the former Economics Minister, according to an interview just aired on the BBC, was asking for this information but not getting it.

    Hmmm...

    Why has Paul gone all the way to Greece to investigate its dubious finances & taxes when he could have got a more interesting story by crossing the Severn Bridge?

    Then again, a budget flight to Athens from London is probably cheaper than paying to cross the Severn!?



  • Comment number 23.

    Greeks have traditionally viewed taxation as pretty voluntary and as a major tourist economy invisible exports play an important part in balancing their economy, so they are in a much better position than us to make change happen.

    We've got to wait for the Autumn spending statement to see just how hard the ConDems are really going to be. Given the mood music and the recent pronouncements on Defence and the lack of a soft underbelly of tax evaders to squeeze and the ringfencing, it's going to be blood in the gutters everywhere else.

    Policing and prisons are for a major chop - Defra is going to be gutted and local government looks for the hammer.

  • Comment number 24.

    I think the Greeks will welch on their paybacks..... the first of a few?

  • Comment number 25.

    Cheers debtjuggler - the latter of course. I should do a story about this tax dodge: how do I contact you?

  • Comment number 26.

    Paul @ #25

    Thanks for replying.

    Glad to hear that you pay your full share of tax like most of the rest of us. I (of course) expected that reply from you.

    I would like not to be contacted directly as I prefer to remain anonymous for various reasons that I don't wish to go into on here. In any case I'm no tax expert (other than having to pay it that is).

    Not wishing to advertise on behalf the balloning personal accountancy industry in the UK....you can find a plethora of accountant services advertising on-line their abilities at reducing direct taxation for high earners by anything up 20%.

    Here is just one example.
    http://darkbluesolutions-px.rtrk.co.uk/employees.html

    As I said, I am not a tax expert, however I do know some of the measures used to significantly reduce a high earners tax liability include the following (...via setting up as limited liability company):

    - Changing their limited company structure – i.e. by splitting their income with their spouse.

    - Cahnging their long-term savings strategy – by transferring funds to be invested in mediums that avoid or defer tax (i.e. pensions and company investments).

    - Reappraising their mid and long-term income strategies. One example is income deferral. This may also include closing the company and utilising entrepreneurs relief.

    - Change their expenses structure in order to avoid tax paid on everyday items.

    This list is by no means exhaustive and is just an example of how some accountants reduce their clients overall tax bill by huge amounts.

    As I sadi in my previous post, this sevice doesn't come cheap, at around £7k per year it's really only an option for those on over approx £100k pa.

    You must have heard of the anecdotal comments about bankers paying less than their cleaners do as a percentage of tax on their total salaries...well it's all true.

    ...and as for non-doms...well maybe that's the subject of another whinge!

  • Comment number 27.

    23 richard bunning

    `Policing and prisons are for a major chop - Defra is going to be gutted and local government looks for the hammer.'

    The prospect of the police having to do some work is long overdue.

    There are too many prisons. Drug addicts should get effective treatment.

    It is about time Deathra was gutted rather than gutting everyone else.

    Local government is well overdue for reorganisation. Lots of decent people working hard for little reward whilst others do little for pay-packets like telephone numbers. It should go back to being small, local and effective which it was before it became big, self-important and laughingly inefficient.

  • Comment number 28.

    When Gordon Brown brought in IR35 against self-employed workers he originally was targeting people in the Media along with Engineers and IT workers.

    At the time I was quite vocal about the potential damage that this would bring to the UK - sadly, I have been proved right but you did not need to be a Bill Gates or a Steve Jobs to realise that. You just needed common business sense.

    Anyhow, I was contacted by a well-known journalist come presenter, who now does other things in TV-land and is paid handsomely for it, who was very keen to highlight the damage that IR35 would bring to millions of self-employed workers.

    He was on the phone to me on the very day that IR35 was about to be formally announced, again excitedly voicing his concern and disgust, but then, would you believe it, self-employed people in the Media were exempted from IR35... it came in that very afternoon against Engineers and Tech workers... and I never heard from that journalist again.

    If you are a freelancer working for the BBC are you still allowed to go off and get paid for after-dinner speaking, opening supermarkets and such-like? How can it be stopped? Restraint of trade? I believe staffers are not allowed?

    I imagine there are very different financial arrangements, and tax advantages/disadvantages, for two BBC journalists sitting side by side? One could be a staffer and the other technically self-employed. But how about middle and senior management within the BBC? Things get greyer there - especially if you end up commissioning your partner, Aunt Sally or some other relative's production company to make programmes? Does this go on - surely not!?

    If you are a self-employed BBC contractor, as many presenters and journalists now are, and you go off and do some after-dinner speaking or you get paid to write the odd article for a magazine or newspaper then you technically have more than one customer so it is not a tax dodge.

    But there is a debateable greyness in that you are on a long-term, often rolling, contract at the BBC which is no different to being employed on staff by the BBC - except that you have tax distinct advantages. Then there is the issue that if you were not on the BBC presenting, for example, the news then would anyone pay you handsomely to open a supermarket, speak after-dinner or have 'fashion photos' in a tabloid? I suspect not.

    I know numerous presenters at the BBC and other Broadcasters who make a very lucrative living from after-dinner speaking, presenting awards in dinner do's for the private sector and so on. Some of them make much more money from this than they do from being paid by the BBC - and that is saying something.

    Then there is the issue of getting commissions for your own production company because you are 'on the inside'? Or offering to present a documentary or Light Ent show that a friend's production company pitches to the BBC. Do some of the 'names' only agree to work with certain production companies? Again, does this go on - surely not?

    The BBC News output is busy looking at the Public Sector now, at the Civil Service, the Councils and pointing out all the over-spending, the waste of money and questioning how such bodies spend our money. It is long over-due that state-funded Broadcasters looked at themselves but that would be opening a can of worms. It would take a brave journalist to do so IMPO.

    By the way, just in case anyone was wondering, the above-mentioned journalist was not Paul.

  • Comment number 29.

    #28 & others

    A subject that does seem to eternally drift just below the public perception radar, possibly,in part, because there is a bit of media self interest involved, that is human nature.

    I am sure this 'legal tax dodge' culture of the semi wealthy and wealthy has been covered before but it never seems to get any real traction as an issue.

    It is also an interesting fault line for journalists to probe in the coalition Gov as the two parties, historically at least, would be poles apart in their attitude to this, yet resolving it could be a key plank in balancing the books on the way to a more sustainable economic model.



  • Comment number 30.

    tawse57 @ #28

    A very well articulated post that raises an important question.

    Why do you think IR35 only targeted engineers, tech workers and computer specialists?

  • Comment number 31.

    If I told you what I thought DebtJuggler then I doubt it would, quite rightly, get published here - rumours on the grapevine & suspicions do not evidence make.

    Suffice to say that post-IR35 the UK tax take from Engineers and Tech workers fell below previous years - and has never recovered. So the country as a whole lost out financially as a result of IR35.

    It also lost out in that a highly skilled, high-revenue earning and much in-demand globaly workforce was decimated. Never recovered.

    You have to ask yourself who benefitted from this?

  • Comment number 32.

    Although IR35 may have only directly raised a few million for the Treasury - see here, the number of contractors/freelancers who opted simply to join umbrella companies as a result of the legislation surged.

    So, the increased income tax and NICs raised as a result will be considerable.

    Therefore, I personally find it unlikely that the new OTS will simply 'abolish' the IR35 rules... although they may well make the rules far simpler (and fairer).

 

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