2.1 Fiscal policy
The primary balance outcome of 2015 as defined under the programme is expected to have reached [xx] percent of GDP, compared to the programme target of a deficit of 0.25 percent of GDP, based on a stronger revenue collection and sizeable one-off factors that were not envisaged when the third ESM programme was agreed in August 2015. Despite the fiscal over-performance in 2015, the medium-term fiscal trajectory has remained unchanged as yields of already legislated measures have been revised down according to actual outcomes and non-implementation of some measures.
The Greek authorities commit to ensuring sustainable public finances by pursuing the fiscal path agreed in August 2015 that was based on primary surplus targets of 0.5, 1.75 and 3.5 percent of GDP in 2016, 2017 and 2018 respectively. [The programme definition of the primary balance could be adjusted to exclude the impact of migration-related expenditure net of EU transfers subject to a proper monitoring mechanism being defined] {This is the first time that the refugee crisis is mentioned. The idea of lightening the demands is in brackets, thus negotiable. The whole mechanism will be under EU control}.
To meet the fiscal targets, as a prior action the Government will adopt a supplementary 2016 budget and other supporting legislation generating savings equivalent to [¾], [2¼] and [3.2] percent of GDP in 2016,{the budget readjustments tend to weight heavier on 2017} 2017 and 2018 respectively through parametric measures, as follows:
- A holistic pension reform (as detailed in section 2.5.1) that will generate additional savings of 1 percent of GDP and compensate for the cost of the Court ruling (equivalent to 2 percent of GDP) on the constitutionality of some aspects of the previous pension reforms. The reform will generate increasing savings beyond 2018 and up to 2025.
- A major reform of the personal income tax yielding 1 percent of GDP which will include the following key elements (see TMU for details){It is very worth mentioning that the data upon which the whole discussion is based are not publicly known. Nobody knows either the Greek or the IMF numbers. Hopefully they do}:
o A substantial reduction in opportunities for tax avoidance, through the pooling of currently separately-taxed employment and business income into a single taxable aggregate with an employment tax credit. The top marginal effective tax rate, including both PIT and solidarity surcharge components, will be capped at [50] percent. {This is a previously known Greek proposal for a 50% increase on very high income taxation, It is now under negotiation}.
o A widening of the tax base through a reduction in the tax credit for employment income from EUR 2,100 to [EUR 1,800]. This will reduce the tax-free threshold to [EUR 8,182]) and ensure that at least 50 percent of those with salary or pension income will pay tax{the Greek FinMin assures that this will not be over 300 euro but he seems to be wrong}. To improve transparency, the tax credit taper will be substantially reduced.
o The permanent integration of the solidarity surcharge into the income tax code with schedular marginal rates from 0-[9] percent closely linked with the income tax brackets.
o The tightening of the definition of professional farmer for taxable income purposes and the elimination of the preferential tax regime for farm income (including direct subsidies) through taxation on the same tax schedule of employment and business income with standard tax credit.
o To provide tax neutrality for investment, the tax rates on dividends and interest income will converge at 15 percent. Rental income will be taxed at 15 percent up to €12,000 annual income and at 33 percent beyond that amount.
- A series of other parametric measures, to generate savings of around [1.2] percent of GDP, including:
o The streamlining of rates and exemptions to increase VAT revenues(savings of about ¼ percent of GDP), including [(i) the introduction of the standard VAT rate for utilities (electricity, gas, steam), water collection treatment and supply services, bottled water and postal services; (ii) raising the VAT rate on entertainment services books, and periodicals from 6 percent to 13 percent; (iii) reducing VAT deductibility for new car purchases for companies. VAT revenues will be further increased through the adjustment of excise taxation in fuels.][authorities to specify]{that's a new, new one}.
o Further control of the wage bill (savings of over a ¼ percent of GDP). [Authorities to specify] This could include (i) a freeze of promotion and wage drift for 2016-18 for the special wage grids, as is currently the case for the unified wage grid; (ii) the extension of the 1:5 public sector attrition rule until [2018].
o A rationalisation of taxation in a number of areas (savings around 0.5 percent of GDP). This includes (i) the harmonization of excise taxes on fuel, gas and electricity with EU standards and directives; (ii) the adjustment of rates and exemptions for ENFIA; (iii) a reform of vehicle taxation, including registration, luxury and circulation taxes and personal income tax allowances for company cars; (iv) raising the mobile phone levy on subscribers by 25 percent and introducing a levy of 10 percent on cable TV for subscribers; (v) increasing the taxation on UCITS funds, Real Estate Investment Companies and Portfolio Management Companies; (vi) a permanent increase in the gross gaming tax([TBC] percent of GDP) [Other measures to be included through discussions with the authorities.]
o Targeted cuts in defence spending ([0.2] percent of GDP). {Previously known as cuts specificaly on NATO expenditure}.
This package of parametric fiscal measures will be bolstered by a wide range of administrative actions on the revenue and expenditure side. On the revenue side, these actions will most notably include those aimed at addressing shortfalls in tax collection and enforcement and to create better incentives to comply that will take some time to bear fruit (see section 2.3). In addition, expenditure reviews will be launched in [May] 2016 and should be completed by end 2016 with the aim of taking actions generating savings of 0.1 and 0.3 percent of GDP in 2017 and 2018, cumulatively.
If annual budgetary outturns confirm that the above administrative measures are yielding sufficiently so as to lead to permanent fiscal over-performance vis-à-vis the programme targets, the authorities may – in agreement with the Institutions – consider the use of the available fiscal space to strengthen the GMI programme and/or to reduce tax burdens provided the achievement of the fiscal targets is assured. {Should the measures prove fruitful, the government may increase minimum income or lighten taxation}
The Greek government will monitor fiscal risks, including court rulings, and will take offsetting measures as needed to meet the medium-term fiscal targets in the context of the Medium-term Fiscal Strategy 2017-2020 to be legislated by June 2016 (key deliverable) and in its annual updates.
The Greek authorities commit to ensuring sustainable public finances and achieve sizeable and sustainable primary surpluses over the medium-term that will reduce the debt to output ratio steadily. The authorities will accordingly pursue a new fiscal path premised on a primary surplus targets of -¼, 0.5, 1¾, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018 and beyond, respectively. The trajectory of the fiscal targets is consistent with expected growth rates of the Greek economy as it recovers from its deepest recorded recession.
The government has recently adopted a reform of VAT and a first phase of the reform of the pension systems; raised the corporate tax rate; extended the implementation of the luxury tax; taken measures to increase the advance corporate income tax in 2015 and require 100 percent advance payments gradually for partnerships etc. and individual business income tax by 2017; and raised the solidarity surcharge.
Furthermore, as a prior action the Government will adopt legislation to:
- raise revenues: a) gradually abolish the refund of excise tax on diesel oil for farmers in two equal steps in October 2015 and October 2016; b) increase the tonnage tax. The authorities will take actions to launch the 2015 ENFIA exercise in order to issue 7 bills in October 2015 with the final instalment due in February 2016. They will also correct issues with the revenue measures recently implemented.
- target and contain expenditure: a) effective immediately, (i) re-establish full INN prescription; (ii) reduce the price of all off-patent drugs; b) launch the comprehensive social welfare review (see section 2.5.3).
- The package will include further measures with budgetary impact, such as public administration reforms, reforms addressing shortfalls in tax collection enforcement, and other parametric measures, recalled in other parts of this document.
To demonstrate its commitment to credible fiscal policies, the Government will adopt (Key deliverable) in October 2015, a supplementary 2015 budget as needed, the draft 2016 budget and a 2016–19 Medium-Term Fiscal Strategy, supported by a sizable and credible package of parametric measures and structural fiscal reforms, including: a) a second-phase of pension reforms, see section 2.5.1; b) a reform of the income tax code, see section 2.2.2; c) phasing out the preferential tax treatment of farmers in the income tax code, with rates set at 20% in the 2016 exercise and 26% in the 2017 exercise. Meanwhile a strategy for agriculture is being developed; d) a tax on television advertisements; e) the announcement of an international public tender for the acquisition of television licenses and usage related fees of relevant frequencies; f) the extension of Gross Gaming Revenues (GGR) taxation of 30% on VLT games expected to be installed at second half of 2015 and 2016; g) an increase of the tax rate on income for rents for annual incomes below €12,000 to 15% (from 11%) and for annual incomes above €12,000 to 35% (from 33%); h) phasing out special tax treatments of the shipping industry; i) extend the temporary voluntary contribution of the shipping community to 2018; j) reduce permanently the expenditure ceiling for military spending by €100 million in 2015 and by €400 million in 2016 with a targeted set of actions, including a reduction in headcount and procurement; k) better target eligibility to halve heating oil subsidies expenditure in the budget 2016.
In addition to the measures above, the authorities commit to legislate in October 2015 credible structural measures yielding at least ¾% of GDP coming into effect in 2017 and ¼% of GDP coming into effect in 2018 to support the achievement of the medium term primary balance target of 3.5% of GDP. The authorities commit to take further structural measures in October 2016, if needed to secure the 2017 and 2018 targets. These would include containing defence expenditure, the planned PIT reform and freezing statutory spending.
Parametric fiscal measures will be bolstered by a wide range of administrative actions to address shortfalls in tax collection and enforcement: these measures will take some time to bear fruit but could offer significant upside fiscal yield going forward.
The Greek government will monitor fiscal risks, including court rulings, and will take offsetting measures as needed to meet the fiscal targets. The authorities intend to transfer at least 30 percent of any over-performance to the segregated account earmarked for debt reduction. In addition, another 30 per cent of the over-performance would be used for clearing unpaid government obligations linked to the past.