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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Greece published on 31 August 2009.
The authorities should give priority to reforming the fiscal sector
The high fiscal deficit and recently rising public debt point to the urgency of improving the financial situation and efficiency of the public sector. The poor fiscal situation left Greece with a weak fiscal armour in the current recession. The room for fiscal manoeuvre, the main stabilisation tool for countries in the euro area, needs to be restored to deal with economic shocks. The recession will also worsen an already difficult fiscal situation and the cost of sovereign debt. The need for reform is enhanced further by the looming pressures on public finances in the coming decades – the expected drop in the inflow of structural funds from the EU and the fiscal burden from demographic ageing. Efficiency of public services, especially in health and education, is below the OECD average. Renewed efforts at reforms in the public sector are thus needed to bring government finances on a sound basis, and enhance the efficiency of public services. A well–functioning public sector would also play a central role for modernising the economy and maintaining a high trend growth rate.
Tax revenue can be enhanced by reducing tax evasion and broadening the tax base
Reducing extensive tax evasion will be key to putting public finances on a strong footing. While recent steps to improve tax collection through the strengthening of tax administration are welcome, tax evasion remains widespread, especially among the self–employed. This reflects weak collection procedures, a large informal sector, frequent tax amnesties and a complex tax system. Collection can be improved by strengthening auditing activities through a better qualified personnel and a more comprehensive exchange of information among agencies. The collection of taxes and social security contributions should be combined in a single authority. This would also reduce the cost of compliance borne by taxpayers and the tax administration, which is among the highest in the OECD. Repeated tax amnesties need to be discontinued, as they only discourage compliance. Broadening of the tax base hinges upon a more simplified tax system. Revenue can be boosted by reducing the number of VAT rates and shortening the list of goods and services that are eligible for reduced rates, and by eliminating exemptions in income taxation. Balancing the level of taxation between employees and the self–employed, who currently face a lower burden, would make the tax system fairer.
Ensuring a better control of primary expenditure would increase the effectiveness of consolidation
The repeatedly missed fiscal targets partly reflect difficulty in controlling spending. In particular, personnel outlays have risen rapidly with diverse systems of special benefits, wage increases beyond productivity gains and overstaffing in many ministries. Public enterprises, hospitals, social security funds and local authorities, which account for a significant part of recurrent expenditure overruns, lack a hard budget constraint. Overall expenditure management needs to be strengthened. Moderate pay increases in the public sector are indispensible not only to improve public finances but also to contain wage pressures, given the sector’s signalling role on private wage bargaining. The establishment of a central wage payments authority, envisaged by the government, is a positive step towards a better management of public–sector wages. The plans to rationalise special employee benefits should also proceed quickly, even though this only concerns new hires. The policy of only partially replacing public–sector retirees should be pursued. Improving the performance of public enterprises should remain a priority, including by rapid implementation of the new operational framework that introduces improved governance and the preparation of annual business plans. It is necessary to ensure that the planned move toward a programme–based budget and multi–year budgetary framework takes place in line with the authorities’ deadline of 2012, and that the implementation of on–going reforms for the modernization of the public accounting proceeds rapidly.
Trends in expenditure - an international comparison
Source: OECD (2009), Economic Outlook database.
Pension reform must continue
In the absence of deep reform, pension costs are estimated to rise to more than 20% of GDP by 2050. High long–term pension liabilities have contributed to some extent to the increase in the government bond spreads vis–à–vis Germany. While recent reforms are welcome and a necessary step forward, they are not sufficient to stem the sharp rise in costs. The merging of pension funds in 2008 by scaling back their number from 133 to 13 and reductions in some early–retirement incentives, especially for mothers of dependent children, will help to rationalise the system and improve supervision of the schemes. The efforts to bring uniformity to the operations and parameters of the recently merged funds, standardise their accounting rules and computerise the system should continue. Regulatory changes and financial incentives adopted to keep seniors in the labour market are also welcome. Nevertheless, further progress is needed. The revision to the list of physically strenuous occupations conferring entitlement to early retirement needs to be completed quickly, and the revised list should apply not only to new hires, but also to workers still well below retirement age. Minimum pensions should be restricted to persons who have reached statutory retirement age. Parametric reform of the pension system is also needed, including extending contribution periods, increasing the entitlement to full early–retirement pensions from 37 years of contributions, lowering the replacement rate and including all or most career earnings when calculating pension rights. Such reforms have already been implemented in a number of other OECD countries.
How to obtain this publication
The complete edition of the Economic Survey of Greece is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Greece Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Claude Giorno and Vivian Koutsogeorgopoulou under the supervision of Piritta Sorsa. Research assistance was provided by Joseph Chien.