On 23 September 2016 the IMF issued a concluding statement following a staff visit to Greece for consultations under Article IV of the IMF’s articles of agreement.
Greece has reduced its fiscal primary and current account deficits to around zero over the past six years. The fiscal adjustment was originally based on important reforms but has increasingly relied on one-off and ad hoc adjustments that cannot be sustained. Society has borne a high cost, with output down by 25% and still stagnating and unemployment and poverty rates much higher than before the crisis. Growth prospects remain weak and subject to high downside risks.
The IMF considers that deeper reforms must be undertaken in key areas to increase the resilience of the economy. Greece must address the vulnerability of public finances resulting from high pension spending financed by high tax rates on narrow bases. In addition to this Greece must address impaired bank and private sector balance sheets; structural obstacles to investment and growth; and the public debt burden.
A fiscally neutral rebalancing of policy in the medium term towards lower pensions and a fairer distribution of the tax burden are essential for maintenance of adequate services and social assistance to vulnerable groups and for creating conditions for investment and growth.
The income tax reform has harmonized tax rates and the value added tax (VAT) reform has simplified the VAT system. The reforms have however relied on increasing tax rates and this creates disincentives to work in the formal economy. The reform has not changed the tax credit which permits more than half of all wage earners to be exempt from income taxes. The IMF considers that Greece should reduce tax and social security contribution rates while also lowering the income tax credit and removing remaining exemptions that benefit higher income groups. This could ensure the tax burden is distributed more equitably.
The IMF considers that Greece should send a signal that it can no longer tolerate tax evasion. The high tax rates have led to the introduction of a proliferation of installment and deferral schemes but the failure to enforce them has suggested that they are in effect schemes for tax forgiveness. As a result there is accelerating tax and social security debt of around 70% of GDP. Around half of all taxpayers owe money on tax and social security.
Tax collection rates have fallen from a low level of 75% in 2010 to an even lower level of less than 50% currently. The problem is made worse by tax evasion by high income groups and the self-employed combined with ineffective tax administration. The IMF therefore considers that Greece should not adopt any further installment schemes but should put in place restructuring solutions for debtors in line with their capacity to pay.
Tax audits should concentrate on large taxpayers and high net wealth individuals. The use of enforcement tools against those who can but do not pay should be strengthened. Also the recently legislated independent revenue agency should be insulated from political interference.
