2020 budget too optimistic – The draft was tabled to Parliament

2020 budget too optimistic – The draft was tabled to Parliament

2.8% growth rate, tax cuts, more investments and increased employment rates constitute the ambitious budget targets for 2020, the draft of which the Government submitted to Parliament yesterday.

In order to maintain the made-up optimism, the government ignores the international recession which many fear it will have consequences on the growth rate of the Greek economy, while on the other hand it relies on a series of high-risk projections, so that (by combining those two) it communicates that “the preliminary draft budget confirms the new era the Greek economy and society enter.

By shaping the budget’s communication framework, government sources stated: “consistent with our commitments, we are pushing for tax cuts and we guarantee growth and employment … In line with what Kyriakos Mitsotakis had announced during the pre-election period and following personal commitments he made while in TIF, the government’s new economic policy relieves the middle class and the weaker ones of the previous government’s unbearable tax burdens. Furthermore, it is laying the foundations for a new era of high growth rates, new and well-paid jobs and significantly increased foreign and domestic investments”.

The government considers the substantial increment of investments to be the key towards accelerating growth rates, and it expects to achieve it by lowering tax rates and by implementing structural interventions.

The government plans to increase real investments, both in housing and other construction and equipment as well, due to tax incentives (Suspension of VAT on new constructions for three years and real estate surplus tax, as well as partial refund of renovation, energy and aesthetic upgrading of buildings paid for by electronic means of payment, which will not put an additional financial burden on the 2020 Budget).

However, it also rather uncertainly projects a 1.8% growth in private consumption against 2019’s 1.1%. This in turn is based on estimates of a 3.5% increase in wages, a drop in unemployment rates by 1.8% – from 17.4% to 15.6% – while at the same time it is not taking into account the tax burden that comes with the measures demanded by lenders to fill the fiscal gap – since the disagreement with the Greek side remains. The target of 13.4% for investment growth, however, is also mighty optimistic.

The finance department argues that overall, the economic recovery measures together with new social initiatives will reach 1.2 billion euros, and that by leaving behind a restrictive policy the 2020 budget will create the necessary fiscal space to enable the national economy to achieve strong growth in the years to come.

The “widening of the tax base (electronic transactions, taxation of real estate based on real estate values, etc.)” is indicative of those optimistic forecasts mentioned above. Finally, it provides for the rationalization of the General Government expenditures, meaning cuts, while it has already increased costs through the creation of a staffing state and my multiplying  the number of dismissible employees.

Apart from that, the preliminary draft budget provides:

  • Family support and incentives against birth control
  • Allowance of up to 2,000 euros for each child born from January 1, 2020, with extremely broad income criteria covering 90% of families.
  • Moving to a low VAT rate of 13% baby products and motorcycle helmets.
  • Reduction of taxes & contributions for natural persons
  • Lowering the introductory income tax rate to 9% and increasing the tax-free threshold for each child.
  • Reduction of the contributions of full-time workers by about one basis point.
  • Reduction of Business Taxes
  • Reduction of corporate income tax from 28% to 24% for the 2019 usage
  • Reduction of profit taxes to be distributed in 2020 from 10% to 5%.

Overall, the government argues that by lowering taxes, by incentivizing businesses and by further loosening the labor market while increasing revenues at the same time, “we create fiscal space for further tax reductions which will lead to strong growth, while filling the fiscal gap  the new government inherited, as the primary surplus is expected to rise to 3.56% of GDP in 2020”. /ibna