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More tax hikes and social spending cuts in 2014

Draft budget foresees €5.6bn more in austerity

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Additional revenue to come from expanding the special property tax and from other direct taxes while the government hopes to spend 16.7% less in the area of social care and insurance

A man skates past a line of closed down shops in central Athens, 4 October 2013 (Reuters) A man skates past a line of closed down shops in central Athens, 4 October 2013 (Reuters) The government's draft state budget for 2014, published on Monday, is a mixed austerity package to the tune of €5.6bn, made up from tax increases of €2.5bn and a reduction in spending in health and social insurance of €3.1bn.

The document foresees increasing the tax intake by 5.4% compared to this year, to produce a total revenue of €49.5bn. Key to that increase will be a 11.2% hike in in direct taxes.

Presenting the draft document on Monday, the alternative finance minister said that the government expects the country to return to growth in 2014 and that the economy will produce a primary surplus - a budget surplus not counting the cost of financing the country's €321bn debt. 

Christos Staikouras said the growth in GDP would be 0.6% and that the surplus would be €2.8bn. He added that GDP would fall by 4% this year, a figure slightly lower than the 4.5% projected and the 6.4% decrease in 2012. 

He also said the general government deficit for 2013 is expected to be 2.4%, compared to the 6% recorded in 2012. He added there were signs that the pace of recession was slowing down, as was the rise in unemployment, which his ministry predicts will fall one percentage point next year from its current 27%.

He also referred to a small but sustainable primary surplus of "at least €340m" in 2013.

Tax increases

As Eleftherotypia estimated last month, the extra revenue in 2014 will come from increasing per capita tax by about €400 on average, which will be paid by country's 5,725,000 taxpayers. Taken as a whole, this will mean that taxpayers will end up paying approximately €3,400 in taxes on average next year.

The additional revenue is expected to come from expanding the special property tax (the so-called haratsi) and from income tax, especially through new tax brackets for wage earners, pensioners and the self-employed.

In detail, the increases will come from:

* the replacement of existing income scales with a three-bracket system for all salaried employees and pensioners

* the sinking of the tax-free allowance of €5,000 to €2,100, for those with an income of up to €21,000. This allowance will be reduced by €100 for every additional €1,000 income

* the abolition of the €5,000 tax-free allowance altogether for the self-employed

* the removal of tax breaks for mortgage interest, rent on primary residences, children studying, insurance and private tuition fees

* the estimation of taxes in accordance with the source of income

* the taxation of of real estate income by 10% up to €12,000 and 33% on anything above that

* increasing by €500m the taxation on real-estate

However, the draft budget is expected to undergo considerable changes upon the return of the troika in late October, in order to cover the fiscal gap of at least €1.5bn.

Spending cuts

Apart from increases in taxation, the draft budget also seeks €3.13bn in social spending cuts. According to its forecasts, the government will spend €49.4bn in 2014, or 5.9% less than the €52.5bn spent this year.

A large chunk of the cuts will be achieved mainly in the area of social care and insurance, where spending will be reduced from €15.9bn to €13.2bn (a fall of 16.7%), due to the reduction in the subsidies paid to pension funds, hospitals and social welfare.

Specifically, cuts will be made to the following:

* ending from 1 January 2014 the Ekas means-tested benefit paid to pensioners to all those under the age of 65

* cutting the allowance paid to families with three or more children

* cutting unemployment benefits

* cutting health benefits at national health provider Eopyy by €529m

* cutting pharmaceutical expenditure at Eoppy by €1.032bn

The draft budget also reveals a new budget gap of about €1bn in 2014, which has resulted from a failure to implement the two measures agreed with the troika, namely

* cutting a further €336m in salaries and pensions of uniformed civil servants (such as the police and military) through the implementation of a new payroll scheme

* an increase of €600m in revenue from those insured with OAEE, the fund for the self-employed, through the imposition of a levy on the gross receipts of all businesses

Presenting the figures on Monday, Alternate Finannce Minister Christos Staikouras left the possibility open that other ways may be found to plug this gap. The draft budget foresees stepping up the controls on undeclared work and on the compliance of employers to pay insurance.

The draft document also foresees spending €133m less on wages and pensions, to be achieved through: 

* the restrictions on the hiring of substitute teachers due to the increase of teaching hours for full-time staff

* reducing staff hired on contracts

* reducing admissions to military and police academies

It's not all cuts, however, as the government expects to increase spending in its public investment programme by €350m, brining it up to €7bn. However, this year, the state spent €200 less than it said it would in the 2013 budget.

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