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27 September 2012, 15:17
Wednesday, September 26, 2012 What Austerity?
Austerity is killing Greece. Or so we’re told. The politicians and the press have a clear narrative: to please foreign creditors, the Greek government is cutting spending to such low levels that the provision of basic services is being compromised. The Greek people, who suffer under these cuts, are rebelling. That’s the story that one reads on a daily basis and it sounds good. Too bad it’s not true.
Yes, Greece is cutting spending. But to call what Greece is doing “austerity” is like saying that going from eating five Big Macs a day to four is “a diet.” Reality is more complicated.
Look at government finances. Basically revenues fell in 2009 but have since held flat. This is due to three forces. First, revenues that depend on work, income and profits have fallen due to more unemployment, lower wages and lower corporate profits. Second, the government has increased value added taxes on consumption, in part because these are easier to collect than direct taxes (where evasion is high). Third, EU financing for investment has increased, providing additional revenue to the treasury.
These measures have kept revenues flat but since the economy is contracting, the ratio of revenues to GDP is at a ten-year high of almost 41%. So yes, there is tax evasion and revenues could be higher, but the state is taking in as much money as at any point over the last decade. Meanwhile, the increase in indirect taxes has plunged the economy into a deep recession as people have less disposable income. Deposits have fallen by 35% due to capital flight and dissaving. Wealth is evaporating.
The reason can be seen on the expenditure side of the equation. From 2008 to 2011, the state cut €13.2 billion (-12.5%) in primary spending (excluding interest). But look closer and the “adjustment” evaporates: less public investment accounts for almost half of that drop, while much of the remainder is explained by less spending on defense, meaning the state is building less infrastructure and buying fewer weapons. Meanwhile, social benefits have risen and spending on wages has declined by merely 7%, largely due to retirements by civil servants rather than any rationalization in public administration.
But consider something else. In 2011, primary spending was at 43.1% of GDP, down from 48.7% in 2009. Yet spending from 2000 to 2006 averaged 40% of GDP. So even today, the state spends three percentage points more than it did earlier in the decade. In fact, once you strip out capital expenditures (to control for the recent drop in investment), the state is spending 5.3% of GDP more in 2011 than it was in 2000-2006. In 2011 terms, that is a €11.5 billion difference, roughly the amount of money that foreign creditors demand that the state cut over the next few years.
This breeds three big questions: why does the reduction of infrastructure and defense spending so compromise the provision of public services; why is it so outrageous to shrink the state back to its 2000-2006 levels; and why can the state not provide with 43% of GDP the goods and services it could provide with 40% of GDP?
These are profound questions that go to the core of what is happening in Greece. Taxes are rising so that the government can buy time to shrink the state back to where it was a decade ago (as a share of the economy). The idea that the state is being starved and therefore cannot provide for its citizens is rubbish. Money is not the issue. The state is alive and well – in fact, it is eating better than it was a decade ago. So much for a diet.
Posted by Nikos Tsafos.
Nikos Tsafos greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.
Austerity is killing Greece. Or so we’re told. The politicians and the press have a clear narrative: to please foreign creditors, the Greek government is cutting spending to such low levels that the provision of basic services is being compromised. The Greek people, who suffer under these cuts, are rebelling. That’s the story that one reads on a daily basis and it sounds good. Too bad it’s not true.
Yes, Greece is cutting spending. But to call what Greece is doing “austerity” is like saying that going from eating five Big Macs a day to four is “a diet.” Reality is more complicated.
Look at government finances. Basically revenues fell in 2009 but have since held flat. This is due to three forces. First, revenues that depend on work, income and profits have fallen due to more unemployment, lower wages and lower corporate profits. Second, the government has increased value added taxes on consumption, in part because these are easier to collect than direct taxes (where evasion is high). Third, EU financing for investment has increased, providing additional revenue to the treasury.
These measures have kept revenues flat but since the economy is contracting, the ratio of revenues to GDP is at a ten-year high of almost 41%. So yes, there is tax evasion and revenues could be higher, but the state is taking in as much money as at any point over the last decade. Meanwhile, the increase in indirect taxes has plunged the economy into a deep recession as people have less disposable income. Deposits have fallen by 35% due to capital flight and dissaving. Wealth is evaporating.
The reason can be seen on the expenditure side of the equation. From 2008 to 2011, the state cut €13.2 billion (-12.5%) in primary spending (excluding interest). But look closer and the “adjustment” evaporates: less public investment accounts for almost half of that drop, while much of the remainder is explained by less spending on defense, meaning the state is building less infrastructure and buying fewer weapons. Meanwhile, social benefits have risen and spending on wages has declined by merely 7%, largely due to retirements by civil servants rather than any rationalization in public administration.
But consider something else. In 2011, primary spending was at 43.1% of GDP, down from 48.7% in 2009. Yet spending from 2000 to 2006 averaged 40% of GDP. So even today, the state spends three percentage points more than it did earlier in the decade. In fact, once you strip out capital expenditures (to control for the recent drop in investment), the state is spending 5.3% of GDP more in 2011 than it was in 2000-2006. In 2011 terms, that is a €11.5 billion difference, roughly the amount of money that foreign creditors demand that the state cut over the next few years.
This breeds three big questions: why does the reduction of infrastructure and defense spending so compromise the provision of public services; why is it so outrageous to shrink the state back to its 2000-2006 levels; and why can the state not provide with 43% of GDP the goods and services it could provide with 40% of GDP?
These are profound questions that go to the core of what is happening in Greece. Taxes are rising so that the government can buy time to shrink the state back to where it was a decade ago (as a share of the economy). The idea that the state is being starved and therefore cannot provide for its citizens is rubbish. Money is not the issue. The state is alive and well – in fact, it is eating better than it was a decade ago. So much for a diet.
Posted by Nikos Tsafos.
Nikos Tsafos greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.
