“Austerity” in Greece

“Austerity” in Greece
July 15, 2012

(This item originally appeared in Forbes.com on July 15, 2012.)


Let’s look at “austerity” in Greece, where the government must certainly be under the greatest pressure of any government today to resolve its financial issues.

In January-May 2012, the central government had revenue of €18.173 billion (this is net of the public investment budget, which is accounted for separately). It spent €29.243 billion.

In the same period in 2011, the government had €18.358 billion of revenue, and spent €27.747 billion.

In the same period in 2010, the government had €19.757 billion of revenue, and spent €25.815 billion. This was before a two percentage point increase in the VAT in July 2010.

In the same period in 2009, the then-unreformed spendthrift government had €18.240 billion in tax revenue, and spent €28.850.

For the full year of 2011, the government had revenue of €49.993 billion, and spent €70.135 billion.

For the full year of 2010, the government had revenue of €50.857 billion, and spent €66.932 billion.

For the full year of 2009, the government had revenue of €48.491 billion, and spent €71.815 billion.

That ‘s a lot of numbers to digest, but it’s worth thinking them through. What do we see?

One thing I don’t see is: any meaningful decline in government spending. Spending is higher in January-May 2012 than it was in the same five months of 2011, 2010, or even 2009.

What about tax revenues? Tax rates have been heading consistently higher. But, did this produce any extra revenue? Revenues in Jan-May 2012 are in fact a little lower than they were in 2009 and 2010, before the big tax hikes.

As far as spending goes, there was no meaningful “austerity” in Greece. Certainly some high-profile services were cut, but this is usually more of a public-relations tool than anything. Governments like to eliminate some high visibility but financially meaningless services to give the impression that dramatic changes are happening.

We are supposed to believe that the hideous economic contraction in Greece is due to the intolerable decline in government spending. The country is in its fifth year of recession, with a 6.9% decline in GDP in 2011. Another contraction of 6.7% is expected for 2012. Nominal GDP contracted from €232.9 billion in 2008 to €215.1 billion in 2011.

But, government spending didn’t actually decline. What caused the economic contraction? In part it is general economic uncertainty, but also, it is the effects of the large tax rate increases on an already-overtaxed private sector.

Apparently, 6,000 businesses have already relocated from Greece to neighboring Bulgaria. Is that because the government said that it would reduce spending, and didn’t? Or, is it because of the increasing tax rates and general environment of chaos and wealth-confiscation in Greece?

Greece’s population (10.8 million) is a little less than that of Ohio (11.4 million). Six thousand businesses lost, from an economy of that size, is a big chunk. Why Bulgaria? For one thing, Bulgaria is a member of the European Union, with all the free trade advantages that implies. The Bulgarian lev is reliably linked to the euro via a currency-board system. In Athens, rumors swirl that Greece will “leave the euro” and presumably introduce some domestic fiat junk doomed to devaluation and collapse.

But, best of all, Bulgaria has a flat tax system with a 10% income tax rate and a 10% corporate tax rate. The VAT of 20% is rather high, but below that of Greece at 23%.

I’ve suggested that Greece should follow Bulgaria’s example. Introduce a flat tax system. Right here and now. When Bulgaria did it, tax revenues actually rose 5.24% in the first year of flat-tax implementation, compared to the last year of the previous tax system. That’s more of an increase in revenue than Greece’s government has gotten from all of its tax-hiking “austerity” attempts. Some of those 6,000 Greek businesses now camped out in Bulgaria might come home.

Greece’s government should then cut its spending dramatically, to bring it in line with tax revenues. This is “austerity with growth,” and it is the same strategy used by Ronald Reagan and Margaret Thatcher in the 1980s. It would work again today, in Greece.