Greek drama: The two issues the creditors forgot to specify
Thursday, 02 July 2015
In a dramatic policy reversal yesterday, the Greek prime minister backtracked on his rejection of the creditors’ proposal that he previously had called an unacceptable ultimatum.
In a letter to the three institutions he wrote that Greece is prepared to accept the staff level agreement from last week, subject to some amendments or clarifications.
For those who have followed the unfolding Greek drama and compared the Greek proposal with the creditors’ counterproposal, the amendments appear as minor and mainly addressing the right timing of some of the measures rather than their substance. It is difficult to see them as a reason for the break-up of the negotiations last Friday.
The only remaining sticking point is whether the current discount regime for VAT on the Greek islands should remain. For Greece there is a fear that the application of full VAT rates would hurt tourism. For the creditors VAT is seen as an untapped source of revenue. In reality it may not matter if businesses on the islands operate in a black market and anyway avoid declaring their incomes.
The creditors’ proposal includes two measures that could mean much to increase taxes in Greece and improve its public sector. However, contrary to the general trust of the counterproposal, they both lack specification and direction.
The first one concerns taxation of the shipping industry, where Greece is market leader in Europe. The institutions propose to “increase the rate of the tonnage tax and phase out special tax treatments of the shipping industry”. What exactly do they have in mind? The proposal is unusually vague on this point.
At the press conference last Monday, European Commission President Jean-Claude Juncker mentioned the need do something about vested interests in Greece, incl. the shipping industry but did not go into any details.
Again, Greece is genuinely worried that taxation of the shipping industry, one of the few sectors in Greece that functions, may scare of the companies to flag out more ships and to relocate their headquarters to tax havens.
From a legal point of view it seems also that a preferable treatment of the shipping industry, though formally considered a state aid, is allowed in EU. Currently the ships are taxed only by their tonnage and not by the profits they are making.
Raising the tonnage tax or widening the base somehow, which already has happened but on a voluntarily basis, might result in more state revenue but not very much.
This is a tricky issue that cannot be left to the Greek authorities to decide by themselves, in particular since exceptions for vested interests have a devastating effect on tax morale and tax compliance. The creditors are by the way quite specific on the need to reform the Greek administration.
The other issue concerns the Greek supreme state audit institution (SAI) or, as it is called the Hellenic Court of Audit. Under fiscal measures, the creditors propose to “phase out ex-ante audits of the Court and account officers”. But they do not say what should come instead.
The creditors do not seem to have a clue.Keeping in place existing ex-post checks is surely not enough. What is required is building up capacity of performance auditing. Currently the Greek SAI is the only in Europe without a performance auditing function.
By carrying out different types of audits, such as financial or regularity auditing and performance auditing, a SAI will contribute to good governance and improvements in the public administration. Public bodies and managers will be held accountable for their actions or inactions.
The Hellenic Court of Audit is a very important institution in the system of checks and balance in Greece and would deserve more attention in the proposal. The proposal is much more specific when it comes to the modernisation of the Greek central bureau of statistics (ELSTAT) and the strengthening of its governance.