US embassy cable - 05ATHENS2092

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