The discussions revolved around ensuring a credible, efficient and well-targeted package of measures that would protect the most vulnerable, and distribute the adjustment burden equitably (to enhance its political sustainability).
targeted primary surplus of 4½ percent of GDP two years later, in 2016 - The end-point target of a 4½ percent primary surplus remains ambitious
Extending the timeline helps Greece benefit from a mild expected cyclical recovery of revenues, reducing the total needed measures to 7¾–8¾ percent of GDP (€13½ billion through 2014, and a further €2–4 billion in 2015–16, depending on the strength of the cyclical recovery)
Total primary spending is expected to fall to 41 percent of GDP by 2014 (Figure 11), while revenues are expected to remain around 43 percent of GDP (compared to projected euro area averages of 45 and 46 percent, respectively). On the spending side of the budget, cuts in special wage regimes, the elimination of various bonuses and planned cuts in public employment will bring the ratio of wages to GDP closer to the European average of about 10½ percent. The pension measures, which bring forward the impact of the 2010 reform, will reduce pension spending from 17 percent to about 14 percent of GDP in 2013, still above, but much closer to the euro area average of 12 percent. On the revenue side, tax reform is expected to keep direct tax revenues close to 10 percent of GDP (still 2 percentage points behind the euro area average, reflecting conservative assumptions about tax administration gains).
Looking forward, the authorities still need to replace the present discretionary and opaque process for granting tax incentives with a more rulesbased approach (e.g., an allowance for corporate equity), and address sources of potential erosion of the corporate tax base (e.g., thin capitalization rules).
The strategy for fiscal adjustment in 2015–16 has not yet been fully identified. To close the estimated gap of up to €4 billion, the authorities intend to focus on retaining expiring measures, base broadening, and gaining efficiency savings from longterm structural reforms. The largest gains would come from extending expiring revenue measures (i.e., the solidarity surcharge on PIT). Staff also sees potential in continuing the reforms of the social benefits system, which remains complicated and inefficient. The fifth review, coinciding with the preparation of the 2014 budget and MTFS update, will aim to define specific measures.
The authorities have not yet finalized plans for staff reductions: Targeted dismissals are essential to help the authorities realize their operational savings goals, and will help to ensure the right mix of skills in the future public sector labor force (reliance on attrition alone provides no guarantees). The authorities agreed to set targets at the time of the next review, once staffing plans are known (these are being developed with French TA).
Slippages would, as envisioned at the time of approval of the Extended Arrangement, be corrected through expenditure cuts. At the request of Greece’s European partners, the procedure has been formalized. The authorities will introduce binding sectoral expenditure ceilings, and new correction mechanisms for state enterprises and local governments (below). Ex-ante buffers within-year buffers will also be set via appropriations that will only be released if targets are met. In case of over-performance deemed sustainable, the proportion devoted to debt reduction has been set at 30 percent, while the authorities can use up to 70 percent of any (permanent) windfall revenue on programs targeting the most vulnerable or to support the recovery (e.g. by easing the labor tax wedge).
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