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Greece: When is it the right time for fiscal stimulus?

28 February 2017

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How can the right time for fiscal stimulus be determined if there are persistent austerity measures, causing a lack of local demand for the services and products that a country offers?

Dimitri Menexis

A common economic problem, which arises when persistent austerity measures are inflicted in a country, is the lack of local demand for the services and products that a country offers, which may leave it with low economic growth and high unemployment for longer periods of time than may be initially anticipated.

Other factors that can be viewed as "cultural driven reactions" to such austerity measures is the effect that such measures have on the level of confidence and uncertainty that is borne in the country burdened with such measures, which can further deepen an economic crisis.

In an economy, one person's spending is another person's income and if everyone is trying to reduce their spending they can be trapped in what economists call "the paradox of thrift", which can worsen a recession.

It has been acknowledged by the competent institutions that forecasts for countries that implemented austerity programmes have been consistently overoptimistic, suggesting that increasing taxes combined with a reduction in government spending result in more damage being done than expected, and the countries that implemented fiscal stimulus did better than expected.

One major factor that influences demand, and therefore growth, in an economy is the level of disposable income that individuals have to spend after the deduction of direct employment taxes, such as social security and personal income taxes, etc. when considering employment income.

Greece has a progressive income tax scale. The maximum income tax rate is 45% on taxable incomes of €40,000 ($40,400) or more. Furthermore, a progressive solidarity tax is also applied on all income declared at a maximum of 10% for declared income of €220,000.

Table 1 shows the total tax and social security on employment income for various levels of gross income, valid from January 1 2017.

For example, for a gross income of €42,051, which falls within the bracket between €40,000 and €82,051 (under which Greek social security ceases to apply), the effective tax rate and social security rate amounts to 60.36%, leaving a net income of €16.671.

Table 1
Gross income (€) Total tax and SS (€) Net disposable income (€) Effective tax and SS rate
40,000 14,074.98 25,925.02 35.19%
60,000 25,578.74 34,421.26 42.63%
80,000 37,861.12 42,138.88 47.33%
100,000 48,695.76 51,304.24 48.70%
120,000 59,717.89 60,282.11 49.76%
140,000 70,185.89 69,814.11 50.13%
160,000 81,281.76 78,718.24 50.80%
220,000 113,898.58 106,101.42 51.77%
280,000 146,362.30 133,637.70 52.27%
500,000 265,877.30 234,122.70 53.18%

Furthermore, increased taxation in a shrinking economy may lead to increased tax evasion as low levels of confidence in a country clouded with high uncertainty can push the people into "survival mode".

Indirect taxes include a VAT sales tax rate of 24%, applied on most goods and services. Furthermore, Greek consumers are burdened with one of the highest gas retail prices in the EU in addition to real estate property taxes, which further diminishes real disposable income and aggregate spending.

When is it the right time for fiscal stimulus? The answer is now.

Dimitri Menexis (dimitri.menexis@gr.ey.com)
EY
Website: www.ey.com






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