## The IMF is Not Asking Greece for More Austerity

_IMF Blog, December 12, 2016_

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## Bibliographic details
- Authors: Maurice Obstfeld, Poul M Thomsen
- Published: December 12, 2016

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### 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.*

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## References

- [عربي](http://blog-montada.imf.org/?p=4597)

_Source: https://www.imf.org/en/blogs/articles/2016/12/12/the-imf-is-not-asking-greece-for-more-austerity_