How Syriza Makes It Harder on Greece
Relying almost exclusively on tax hikes makes Greek recovery more difficult.
The good news is that Greece has moved. A deal looks possible, although it is by no means certain. The bad news is that Greece is putting forward the wrong kind of deal.
Athens’ latest proposals rely almost exclusively on tax hikes — rather than on pro-growth structural reforms and well-targeted expenditure cuts.
Around 93% of the measures Greece is proposing consist of tax hikes, including a short-term special 12% levy on many business profits, followed by a rise in the corporate tax rate from 26% to 29% in 2016.
This would repeat the key mistake of the early 2010-2013 bailout programs for Greece, namely to hit aggregate demand too hard — instead of raising supply fast. (See TG’s recent coverage of Greece here.)
A bad deal would still be vastly better than no deal at all. It would avoid a Greek default and the Grexit abyss. It would eventually allow Greece to emerge from the Tsipras recession into which the new government has pushed the country.
Pushing it backwards
But it would still be a badly skewed deal, unnecessarily prolonging the misery in Greece.
Having already pushed Greece back into a cyclical recession, Syriza may now reduce the long-term growth potential of the country.
As was the case under the PASOK led-governments in 2010-2012, policy makers from the left apparently find it easier to raise taxes than to cut the privileges of trade unions or other special interest groups, even though the latter steps make the economy inflexible and restrain supply.
In the pension system, Greece wants to abolish early retirement schemes and slowly raise the retirement age, reaching 67 years only by 2025.
Instead, it wants to plug much of the glaring gap in its pension systems by increasing contributions from workers and companies into the major pension system.
Raising the effective retirement age would have added to the supply of labor and hence Greece’s growth potential.
The road now chosen by Syriza — higher contributions — would reduce aggregate demand and make it more expensive to employ workers.
That’s a double whammy from the vantage point of anyone hoping to improve the outlook for Greek employment. Not the best way to do it, to put it mildly.