Cut salaries and increase taxes now, provide relief later

The IMF and OECD have issued a "bitter" prescription for Greece, with the elimination of sectoral agreements and relevant operational support, reduction of compensation to be given in case of dismissal, a freeze on increases in wages in the private sector, as well and complete detachment of wages from inflation

This plan is proposed by the IMF, while OECD recommends cuts in redundancy and minimum wages to almost unemployment benefit levels, aiming to reduce labor costs and thereby leading to a reduction in unemployment.

At the same time, the IMF spring report on world economy considers that a new tax increase, or even a further reduction of public spending, are necessary for our country and will boost the low competitiveness of the Greek economy in the short term. It stresses, however, like OECD, that as soon as a reduction of the budgetary targets is achieved, the state should reduce taxes on businesses and individuals in order to avoid the sinking of the Greek economy into permanent decline.

In the same report, IMF estimates that unemployment in Greece will exceed the estimated budget figures in the current biennium. For this year it will be settle at 14,8% and will jump to 15% in 2012.
 
SOE massacre

The government is moving along the same lines, determined to implement a single payroll for SOEs, if it doesn’t manage to pass the new cuts that are being drafted for salaries, benefits and operational costs.

Although data for the first two months of the year shows that losses in 18 SOEs have been reduced to 61%, mainly due to wage cuts, the government will use the new package to attack:

    * lofty wages
    * bonuses of executives
    * operational costs

while an increase in invoices and revenue of state enterprises will be sought too.

Within a year, 18 SOEs decreased their expenditure by 36% due to:

    * a 30% reduction in 2011 salary costs
    * the reduction of various operating expenses by 69%.

On the other hand, however, the same enterprises are showing a 16% overall revenue reduction, which is largely due to the extensive "clipping" of subsidies from the state budget.

Estimates

But IMF analysts are saying that there must be a national consensus on the burden of fiscal adjustment for wage cuts to have a substantial effect in preventing further lay offs.

The IMF estimates that the Greek economy will run this year at a -3% rate (as estimated in the state budget too) and the GDP rate will improve to 1,1% in 2012. In fact, the Fund’s managers believe that the Greek economy is at the lowest point of the recession and will eventually improve its fiscal figures.

Exports are characterized as the economy’s "fuel", since all figures show a significant increase in the GDP percentage rate, especially in 2010.

Nevertheless, the IMF is expressing strong concerns about the low competitiveness of the Greek economy, with the current deficit estimated at -8,2% of the GDP for 2011, followed by a slight improvement to 7,1% in 2012. However, this will require acceleration in the implementation of structural changes in all areas. The report stresses that higher taxes can help the deficit in the short-term, but in the mid-term the government should proceed to tax reduction in order to boost investment activity.

On the other hand, the forecasts for inflation in Greece are optimistic and the figure is expected to decelerate to 2,5% in 2011 and 0.5% in 2012.