Greece Running Out of Money as Tax Collections Wane
By Andy Dabilis on June 6, 2012 in Economy, News, Politics
ATHENS The combination of political uncertainty and the fear that Greece will be forced out of the Eurozone and return to the drachma have worsened the countrys ability to collect taxes, with revenues falling far short of expectations, leaving the treasury with only enough money to pay salaries and pensions for another month.
Bank of America Merrill Lynch said Greece may run out of money as early as July, two weeks after the June 17 critical elections, and that revenue goals fell short of goals by $615 million in the first four months of this year, as Greeks have stopped paying taxes whenever they can and companies that used to pay are scrambling to hide their income in foreign banks. The newspaper Kathimerini said that tax collections during the first 20 days of May had fallen 20 percent over the same period last year, and that tax evasion despite a crackdown of sorts in which nearly 200 people were arrested but not prosecuted is continuing to increase.
The austerity measures demanded by international lenders, in return for a first bailout of $152 billion and a second for $173 billion that is on hold to see whether anti-austerity parties win and try to renegotiate the terms or renege on payments, has just made the revenue picture worse, the tax collection figures show. The Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) putting up the money, said the incoming government cannot tinker with reforms and must make an additional $15 billion in cuts or the rescue loans could stop, leaving Greece broke almost immediately.
After the elections, the Troika will almost certainly find that Greece has slipped far behind targets in May and June, Holger Schmieding, Chief Economist at Berenberg Bank, told the Bloomberg news agency. If Greece gets a cooperative government, the Troika will likely recalibrate the program for Greece to take account of the new starting position for the new government.
The New York Times reported that government coffers could be empty as soon as July and that Greece might have to temporarily stop paying for salaries and pensions, along with imports of fuel, food and pharmaceuticals. Officials of Greeces temporary caretaker government are considering diverting billions of dollars set aside to recapitalize the countrys failing banks or even handing out IOUs instead of cash payments as the government faces a temporary shortfall of at least $2.17 billion because the pay cuts, tax hikes and slashed pensions have worsened a deep recession of 21.7 percent unemployment and with 1,000 businesses a week shutting their doors. The Greek government is owed more than $60 billion from tax cheats, but officials have acknowledged little may ever be recovered.
Income expected from a higher, 23 percent Value-Added Tax (VAT) required by the bailout agreement has fallen short by $1 billion in the first four months of 2012, partly because cash-strapped businesses that were once law-abiding have started hiding money to stay afloat, tax officials told The Times.
Tax evasion increases by an average 0.2 percent of annual Gross Domestic Product (GDP) as Greek elections approach as the bureaucracy that relies heavily on day-to-day control by politicians slows and tax collectors perform fewer audits, according to a study published last year by Spyros Skouras and Nicos Christodoulakis, a former finance minister, from the Athens University of Economics and Business. The study reviewed 13 elections between 1974 and 2009.
I dont think anything has essentially changed as to how the public sector works in the last two years, Skouras told Bloomberg in an interview. People respond to incentives, and when they know the likelihood of being punished for tax evasion is low, they will evade more.
The European Financial Stability Facility said that Greece will get $6.52 billion by the end of June but that $5.27 billion will be used to repay the ECB, leaving little for government operations. The specter of a return to the drachma may be dissuading some debtors from paying taxes in euros that they might be able to pay in drachma if they wait, according to Skouras. Eurobank Chief Economist Platon Monokroussos said he thinks the country can recover though, unless the elections create another stalemate as they did when the May 6 elections failed to give any party enough of the vote to form a government.
(Sources: Kathimerini, New York Times, Bloomberg)