GOG PLANS NEW TAX PACKAGE AS REVENUES FALL SHORT

UNCLAS SECTION 01 OF 02 ATHENS 002092

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN GR
SUBJECT: GOG PLANS NEW TAX PACKAGE AS REVENUES FALL SHORT
OF TARGET

REF: ATHENS 2053


1. (U) Summary: The GoG is considering a new round of tax
increases in the face of disappointing half-year revenue and
expenditure actuals. As a result of lower than expected
revenues and higher than expected government expenditures
from previous revenue efforts, the 2005 budget deficit will
be closer to 4.5 percent of GDP, rather than the GoG,s 3.6
percent Growth and Stability program target. End Summary.

Back to the Books
--------------

2. (U) The GoG is considering a new round of tax increases
in the face of disappointing half-year revenue and
expenditure actuals. In the first six months of 2005,
revenues increased 3.6 percent, far below the hoped-for
annual target of 11 percent. To make matters worse,
expenditures grew by 6.7 percent during the same period,
against a targeted 4.6 percent growth rate. As a result of
the lower than expected revenues and higher than expected
government expenditures, the 2005 budget deficit will be
closer to 4.5 percent of GDP, rather than the GoG,s 3.6
percent Growth and Stability program target.


3. (U) After a disappointing start to 2005, the Ministry of
Economy and Finance hoped that revenues and expenditures
would be on target by June so that additional austerity
and/or tax measures would not have to be taken. Due to the
recently released 2005 actuals, however, the GoG is debating
new tax measures to meet its Stability and Growth program
target of a 3 percent public deficit/GDP ratio by 2006. The
additional tax measures being considered by the GoG include
increases in property taxes, automobile taxes, the gasoline
tax, and limiting increases in civil servant salaries to
below inflation. These new reforms will be finalized by
October 2005, in time for Greece,s next Growth and Stability
program report to the European Commission.

Previous Revenue Measures
--------------

4. (U) Several fiscal reforms were implemented in 2004 and
early 2005 in order to encourage economic growth, promote
investment, and reduce the budget deficit pursuant to the
GoG,s Stability and Growth pact obligations. In late 2004,
the GoG passed a bill cutting corporate and personal income
taxes that will be gradually phased in through 2007. In an
attempt to increase tax revenues by combating tax evasion,
the law replaced the Financial Crimes Unit, SDOE, with the
more powerful YPEE (Special Inspections Service) that now has
the right to bypass privacy laws, freeze bank accounts, and
confiscate company computers. Further tax reforms aimed at
increasing investment in new technologies allow firms to
deduct up to 50 percent of their R&D costs from their net
earnings. Effective this past April, the GoG increased the
Value Added Tax (VAT) by one percent as well as several
consumption and excise taxes. The GoG has resisted
expenditure cuts, certain to be politically sensitive,
arguing that the permanent reduction in Olympics-related
spending will amount to an expenditure savings of
approximately 1.03 percent of GDP.

The New Plan
--------------

5. (U) The center piece of the GoG,s new revenue plan is
an overhaul of Greece,s complex and evasion-ridden real
estate tax code. In a draft bill introduced this week, the
GoG proposes eliminating the existing 11 percent transfer tax
and imposing a graduated capital gains tax for property
transfers, depending on the number of years the property was
owned, and a 19 percent Value Added Tax (VAT) on the purchase
of new real estate. The law would also alter the formula for
assessing the value of real estate, which could adjust the
value upwards by as much as 10 times in some instances,
effectively increasing the taxable base of real property.
The last two times assessed property values were upwardly
adjusted, 1997 and 2001, property tax revenues increased 57
and 37 percent, respectively.


6. (U) The Ministry of Economy and Finance also envisions
more tax reform for the future. There are press reports that
a 25 percent flat corporate and individual income tax rate is
being considered by the GoG as a way to promote economic
growth and increase the competitiveness of the Greek economy.
The GoG also plans to take additional steps to combat tax
evasion and government waste, which costs the treasury
billions of euros annually. A plan to put double bookkeeping
checks in place to decrease the multibillion euro tax evasion
in diesel has already been finalized by the Ministry of
Economy and Finance (reftel).


7. (SBU) Comment: The disappointing half-year revenue and
expenditure figures create an uncomfortable situation for the
GoG. It clearly hoped to avoid politically painful austerity
measures through revenue increases, both from tax increases
and increased efforts to combat evasion. In light of the
failure of revenues to increase sufficiently, however, the
GoG will need to consider more stringent fiscal policies.
Although the GoG has not announced austerity measures, it
must be aware that another new tax package will probably not
mollify the European Commission during the upcoming review of
its Stability Pact performance; belt-tightening expenditure
measures will have be implemented, painful as that may be.


8. (SBU) Nevertheless, increasing revenue should continue
to be a GoG priority, although the focus should be on
combating tax evasion rather than raising tax rates. Tax
evasion is widely practiced in Greece, both at the corporate
and individual level. Greece,s corporate and individual
income tax rates are higher than the EU average, but revenues
as a percentage of GDP are lower than the EU average.
Additional tax rate increases are likely to yield diminishing
returns, especially given a tax code that is already widely
reviled as Byzantine in its complexity. The real money lies
in trying to collect on what is already owed, either through
stepped-up enforcement efforts, or closing loop-holes and
incentives for tax evasion by simplifying the tax structure
and applying it in a fair and consistent fashion. End
Comment.
RIES