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Tsipras Courts Public Approval by Slashing Taxes

Greek PM Alexis Tsipras commits to slash taxes and raise pensions – in a bid to reverse austerity measures – before a series of high-stake elections

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Greece is set to hold general elections in October, and PM Alexis Tsipras’ Syriza party is looking to shore up approval, and give their party a boost in the polls. To that end, Tsipras promised to cut taxes and increase pensions, after years of austerity.

At a press conference, he announced that “The time has come for the sacrifices of the Greek people to be rewarded”, he said. “The money is on the table“.

Altogether, Tsipras said the government would slash tax rates on a variety of goods and services. On VAT on food; Tsipras promised to cut it from its current 24 percent to 13 percent; decrease electricity and gas taxes from 13 percent to 6 percent; reduce hotel tax from 13 percent to 11 percent; and give poor retired seniors an extra half a month’s worth of pension every year, for a total of 800 million euros to be distributed.

Also up to be slashed, is the “solidarity tax” on annual incomes up to 20,000 euros, and a  reduction for all other incomes starting next year. Tsipras likewise seeks to lower the corporate tax rate to 25 percent by 2021, down from its current 28 percent.

Furthermore, Tsipras’ government seeks to demonstrate its concern for poorer citizens, as they were hit hardest during the ten years of austerity. To that end, the Labour ministry submitted a bill to Parliament, that provided relief to people in arrears which are attributable to delays on payments of tax and pension contributions.

It was Tsipras’ government that increased the taxes on food, in 2015 and 2016, to avoid breaking the conditions of an EU-backed bailout package; but Greece exited its last bailout programme in August, 2018. However, the country still owes billions of euros to the IMF and European creditors, some of which it hopes to pay back ahead of schedule. Currently, Greek national debt is 180 percent of its GDP.

Now, those taxes will be reversed, scheduled to take effect over a period from 2019 to 2021. Such tax cuts were made possible, due to government savings and strong economic performance. Two successful bond auctions also helped restore Greece’s liquidity and independent financing. In addition to that, Greece sold treasury bills (T-bills), worth 812.5 million euros (910 million US dollars) on Wednesday, May 8th, according to the Public Debt Management Agency.

Greece’s strong economic performance would also allow the country to pay off 3.6 billion euros in IMF loans. “What we are doing today is an example for Europe (…), less austerity and more growth without violating our agreements“, said Tsipras.

Political Survival

The timing of the announcement is no coincidence.

The move comes to counter conservative opposition party New Democracy’s negative painting, of Alternate Health Minister, Pavlos Polakis, who had made disparaging comments about a conservative member of Parliament who is wheelchair-bound. (Polakis had said that Stelios Kymbouropoulos, who has spinal muscular dystrophy, received preferential treatment in securing a state job, due to his disability.)

The New Democracy party welcomed Tsipras’ tax relief, but criticized Tsipras for “cribbing” from their economic programme as a pre-election hand-out, while simultaneously saying it would “demolish the economy and middle-class, with over-taxation”.

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Pensioners lining up outside a National Bank of Greece branch in Athens. Copyright: Ververidis Vasilis / shutterstock.com

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Tsipras survived a confidence vote on May 15th, the fifth since he took power in 2015. In the end, he won the vote 153-136, after a heated three-day debate in Parliament. Syriza has 145 seats in the 300-member Parliament, but Tsipras also received the support of eight independent lawmakers, cementing his victory.

“We are presenting policies that will lift many people out of the crisis”, Tsipras said before the vote. “Greece of many and Greece of the elites are two different worlds that are incompatible.”

European Parliament elections are around the corner on May 26th – held the same day as regional and municipal elections – and a few months after that, Greece has general elections. Initial polling shows that the opposition party, New Democracy, has a lead on Syriza – a lead that Tsipras hopes to erode.

Tsipras has pledged that elections will be held in October, at the end of his four-year term. However, the possibility of early elections cannot be fully discarded, as minority governments are often difficult to handle, even in the best of times.

European Reaction

Altogether, the fiscal plans for 2019 are worth 1.1 billion euros, and those for 2020 are worth an estimated 3.2 billion euros. It would require that Greece’s creditors lower the country’s primary surplus targets.

Nevertheless, Tsipras faces disapproval from the lenders Greece is still accountable to. The plans “may not be in line with commitments”, one EU source said, adding that EU officials had also raised concerns during a regularly-scheduled mission to Athens, which ended on Wednesday, before Tsipras won the no-confidence vote.

“Tsipras’ proposals are just the kind of political-related fiscal relaxation that we have been worried about in our debt sustainability analyses”, a second official said.

The official EU statement, released at the end of the mission to Athens, was circumspect:

“The mission took note of the announcement of new measures, which will be assessed with a view to compliance with agreed fiscal targets and consistency with Greece’s post-programme commitments to the Eurogroup.”

Peter Dolman, the chief of the IMF delegation in Greece, said on Thursday, that Tsipras’ financial plans ”are moving in the wrong direction”. Speaking at the third International Conference of the Economic Chamber of Greece, Dolman instead suggested, that the Greek government should ”move toward the direction of broadening its tax base”.

“It’s important for Greece to stick to agreed fiscal targets”, said European Commission Vice President, Valdis Dombrovskis.

It is unlikely that the announced financial measures will cause immediate problems, due to Greece’s large cash buffers; problems, if any, would likely only manifest later on. To alleviate concern, Greece has promised to deliver budget surpluses, excluding debt services, of 3.5 percent annual economic output up to 2022. This year, that would add up to 1.14 billion euros, in addition to Greece’s already present 31 billion euros buffer. While Greece has since reduced its primary surplus projections to 2.5 percent from 2020 to 2022, another 5.5 billion euros is set to be deposited in an escrow account, which will serve as a guarantee that Greece will meet its fiscal targets and debt obligations until the 2022 target year, regardless of changing surplus targets.

“We promised 3.5 percent and they (the lenders) will get 3.5 percent”, Finance Minister Euclid Tsakalotos said. “Either they will get it from the escrow account, or from our outperformance (…) It’s our guarantee.” This target is now set to be met, either from the surplus, from the escrow fund, or a combination of both.

Those fiscal targets were set in an agreement with Greece’s creditors, in exchange for debt relief measures, and were part of the overall debt sustainability analysis, and how European creditors will react to the change in the plan remains to be seen. “The commitment the Greek government made in the context of the ESM programme and the medium-term debt relief measures, is very clear: The agreed primary surplus target until 2022 is 3.5 percent of GDP”, a spokesperson from the European Stability Mechanism said, right after Tsipras announced the new fiscal plan.

In contrast, Tsipras remained optimistic: “the issue is a political one, and there will be discussions with creditors, but it is a win-win idea”, a government official confided, asking not to be named in line with policy.

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B. Lana Guggenheim

Lana is a freelance journalist based in New York City. She has a M.Sc. in International Conflict from the London School of Economics and Political Science. She has worked as an analyst, reporter, and editor, covering extremism, culture, economics, and democracy.

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