The IMF is Not Asking Greece for More Austerity

IMF Blog, December 12, 2016

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The IMF is Not Asking Greece for More Austerity

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Bibliographic details

• Authors: Maurice Obstfeld, Poul M Thomsen
• Published: December 12, 2016

Main message

• The IMF is not demanding more austerity for Greece; it warned that a primary fiscal surplus of 3.5 percent of GDP by 2018 would generate austerity that could prevent the nascent recovery from taking hold.
• The IMF projected that the measures in the ESM program will deliver a surplus of only 1.5 percent of GDP, and said this would be enough for the IMF to support a program.
• The IMF did not call for additional measures to achieve a higher surplus; the Greek Government and European institutions agreed to temporarily compress spending further to try to reach 3.5 percent of GDP.

Why the currently agreed budget is unfriendly to growth and equity

• Income tax structure:
  • The income tax regime exempts more than half of households from any obligation (the average for the rest of the Euro Zone is 8 percent).
• Pension system:
  • An extremely generous pension system costs the budget nearly 11 percent of GDP annually (versus the average for the rest of the Euro Zone of 2¼ percent of GDP).
• Composition of adjustment:
  • Greece has relied on deep cuts in investment and so-called discretionary spending.
  • Resulting effects: decaying infrastructure hampering growth; delivery of basic public services such as transportation and health care being compromised.
• Sustainability of cuts:
  • The ESM program assumes further cuts in investment and discretionary spending to achieve a 3.5 percent of GDP primary surplus.
  • Such cuts may be managed in the short run but cannot be sustained and are inconsistent with Greece’s ambitious long-term growth target.
• Labor market and social protection:
  • Greece lacks unemployment compensation and other well-targeted social benefits common elsewhere in Europe.
  • The Government’s restriction on collective dismissals functions as a substitute for unemployment compensation, impeding modernization of the economy.

Debt relief, primary surplus targets, and burden-sharing

• Debt sustainability:
  • Greece’s debt is highly unsustainable; no amount of structural reforms will make it sustainable without significant debt relief.
  • Conversely, no amount of debt relief will restore robust growth without reforms.
• Primary surplus and debt relief calibration:
  • IMF suggested using a primary surplus target of 1.5 percent of GDP to calibrate debt relief.
  • Higher primary surpluses maintained by Greece would reduce the amount of debt relief required from partners.
• Political constraints:
  • Some member states are reluctant to accept a 1.5 percent of GDP calibration because they would themselves have to run higher primary surpluses or because they provide less generous benefits/tax exemptions than Greece.
  • The Euro Zone is not a full political union; a solution must be politically acceptable to 19 sovereign member states.
  • A compromise may involve a higher primary surplus for a while, although this is not the IMF’s first choice.
• Credibility conditions if 3.5 percent of GDP is agreed:
  • There needs to be a credible plan to push the surplus beyond 1.5 percent of GDP; this would require significant additional measures that are not yet in place.
  • Credibility requires these additional measures be legislated upfront to demonstrate political resolve to overcome resistance from vested interests.

Policy recommendations and sequencing

• Reform fiscal structures (taxes and spending) to make the budget more growth-friendly and equitable.
  • Use the gains from these reforms fully to increase spending or cut taxes to support growth, not to generate additional austerity or a higher primary surplus.
  • Adopt a medium-term plan now to restructure the public finances; implementation need not—and cannot—happen overnight.
• Prioritize:
  • Tax reform to broaden the tax base and reduce exemptions.
  • Pension reform to reduce the budgetary burden.
  • Restore and protect investment and discretionary spending critical for infrastructure and public services.
  • Establish well-targeted unemployment compensation and social benefits to facilitate labor market reforms (e.g., lifting restrictions on collective dismissals).
• Sequencing for debt relief and targets:
  • Prefer calibrating debt relief to a 1.5 percent of GDP primary surplus.
  • Avoid an open-ended long-term commitment to very high surpluses (such as 3.5 percent of GDP) because it is not credible and will harm short- and medium-term growth.
  • If a short-term 3.5 percent of GDP target is agreed, require upfront legislated measures to make the target credible.

Source: The IMF is Not Asking Greece for More Austerity, Maurice Obstfeld and Poul M. Thomsen, December 12, 2016.

Content in this bundle

• 121216g
  • 121216g (Markdown version)
  • 121216g (PDF)
• Το ΔΝΤ δεν Ζητάει Περισσότερη Λιτότητα για την Ελλάδα
  • Το ΔΝΤ δεν Ζητάει Περισσότερη Λιτότητα για την Ελλάδα (Markdown version)
  • Το ΔΝΤ δεν Ζητάει Περισσότερη Λιτότητα για την Ελλάδα (PDF)
• Appendix to Blog
  • Appendix to Blog (Markdown version)
  • Appendix to Blog (PDF)
• The Case for Making the Greek Budget More Growth Friendly
  • The Case for Making the Greek Budget More Growth Friendly (Markdown version)
  • The Case for Making the Greek Budget More Growth Friendly (PDF)

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