Seeking Sustainable Growth

Finance Minister Christos Staikouras says measures have been taken to restart the real economy, attract investments, and fuel future growth.

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GIG: The conservative government has been elected on a promise to implement pro-growth policies and deliver jobs. What are your main steps in this direction?

Staikouras: We are setting forth two, interrelated objectives: the first is focused on how we will close the negative output gap while safeguarding sustainable public finances. The second is centred on how we will improve the economy’s supply side, i.e. its productive capacity, in order to achieve sustainable high growth rates and a high level of social cohesion.   

To achieve these objectives, we have adopted a holistic policy approach. Key ingredients of this approach are prudent fiscal policies adhering to agreed fiscal targets; growth-inducing and employment-enhancing initiatives, including the reduction of corporate and personal income tax rates; privatisations and reforms aimed at enhancing competitiveness; initiatives to strengthen the effectiveness of the public administration; overall institutional performance measures designed to safeguard the stability of the financial system and its ability to fulfil its vital role in fostering long-term sustainable growth; as well as policies designed to substantially mitigate income inequality and social exclusion.

Thus, the new government in its first months has covered the fiscal gap observed in the Enhanced Surveillance Report; reduced the property tax; improved the instalment scheme for private debt; eliminated the remaining capital controls; introduced electronic accounting books; reversed the previous government’s ineffective legislation on the labour market; and secured parliamentary approval for the 2020 budget (including all provisions agreed with the European institutions) as well as for a systematic solution for reducing NPLs on banks’ balance sheets. In addition, we are implementing a restructuring plan for Public Power Corporation (PPC), have unblocked emblematic projects and privatisations, repaid the most expensive portion of the International Money Fund (IMF) loans and passed an omnibus law to improve the investment environment.

GIG: Have you reached an agreement with Greece’s creditors on how to bridge the fiscal gap that they anticipate for the 2020 budget?

Staikouras: Our European partners recognise that – according to the data so far and preliminary estimates – there is no fiscal gap for either 2019 or 2020.

Higher growth rates, systematic access to capital markets, the complete lifting of capital controls, scrupulous discipline in general government entities, the adoption of realistic budget ceilings, spending reviews, the enhancement of electronic transactions, the regulation of the online gambling market, the broad adoption of public-private partnerships, and the implementation of the instalment scheme for private debt have created the necessary fiscal space for further tax cuts on corporate, dividends, and personal income tax, as well as on real estate taxes in 2020.

GIG: One of the criticisms aimed at Greece’s financial sector is that new loans provided to small businesses, the backbone of the Greek economy, remain minimal, which is counterproductive to economic growth. How do you plan on reversing this?

Staikouras: The positive outlook for the Greek economy has reduced the cost of borrowing. This is reflected in credit ratings upgrades and in the country’s successful bond issuances. As a result, banks’ access to money and capital markets – at a lower cost – is gradually being restored, deposits are returning to the banking system, and corporate and household credit is improving.

These elements have a positive effect on financial institutions, which are called upon to restart the real economy, on solid ground, as a lever for economic growth.

But undoubtedly, the large amount of NPLs makes the necessary credit expansion difficult. For this reason, the government has made significant progress to introduce, through legislation, an asset protection scheme called Hercules, which has already been approved by DG Comp [the EU’s competition authority].

Hercules is a market-based voluntary model similar to the Italian securitisation scheme, allowing banks to transfer securitised NPLs into a special purpose vehicle (SPV). The state will guarantee the best part of the securitisation structure (the less risky notes of the securitisation vehicle, i.e. the senior notes), which will be thoroughly rated. In exchange, the state will receive remuneration at market terms.

Thus, the risk of the state will be limited since the state guarantee only applies to the senior tranche of the notes sold to the securitisation vehicle. The mezzanine and junior tranches will be sold to private investors and will not benefit from the state guarantees.

Hercules is based on credible benchmarks that will satisfy the very strict EU requirements.

GIG: Can you tell us about your initiatives to reduce taxes? What specific fields are being considered? What is the expected impact?

Staikouras: Our key priority consists of a comprehensive tax reform that will accelerate economic growth.

To date, the government has passed legislation reducing property tax on average by 22%, and a new instalments scheme designed to operate as a last chance for households and enterprises to clear outstanding debts towards the government and social security funds.

Furthermore, the business tax was reduced to 24% (from 28%) for the fiscal year 2019, the dividend tax was reduced to 5% (from 10%), personal income tax was reduced with an introductory rate of 9% (from 22%), along with tax incentives to stimulate construction activity, measures for families and childbirth

In addition, social security contributions for full-time employees will start to be reduced in the second semester of 2020.

With these measures, all income classes benefit from larger disposable income, which is, by percentage, higher in lower income levels. This leads to further reduction in income inequalities. According to our estimates, for declared income up to €8,500, the total tax burden is reduced by an average of 20%.

On the contrary, the corresponding reduction in high incomes is a one-digit figure.

GIG: What other reforms are at the top of your agenda?

Staikouras: What is needed farther down the road is the swift implementation of a coherent and realistic economic plan that will enhance the quantity and improve the composition of the domestic product in terms of productivity, structural competitiveness, and extroversion.

This entails, among other things, simplifying licensing procedures, improving the planning framework, facilitating the installation of business parks, setting up an infrastructure record to better inform and attract investors along with a single digital chart, improving the institutional framework, restructuring the energy market, investing in the digital economy, simplifying and shortening the process by which private-public partnerships receive approval, accelerating procedures for large investments, supporting export-oriented companies, removing prudential regulations, reforming the labour market, decreasing trade unions’ bargaining power, and investing in endogenous growth sources like education, research, and innovation.

Moreover, we will provide all businesses with a fully digital platform to record their transactions in real time and fulfil their tax obligations by 2021, regarding electronic accounting books, electronic invoicing, online cash registers, and electronic shipping notes.

Additionally, we will set up a comprehensive digital governance reform, comprising a human resources management system for all general government entities, an enterprise resource planning system for all intra-business verticals, and a citizen relationship manager system to better coordinate and manage citizen relationships between them and the state.

And finally, we will adopt a new single insolvency framework by utilising innovative tools, such as an electronic platform with digital processes for debt restructuring, pre-agreed debt settlement proposals between creditors, a credit bureau for data collection and sharing, early warnings, as well as certified property valuators, financial experts, and mediators to alleviate courts.

GIG: Meanwhile, the country has committed to some very demanding fiscal goals. Do you see these goals being revised? If so, what is the timetable?

Staikouras: The government’s strategy is to build all the necessary conditions for the mutually beneficial reduction of primary surpluses. The implementation of the above-mentioned economic plan will lead to an upward trajectory. In turn, higher growth rates, as well as low funding rates, will improve debt sustainability.

To that end, using profits from the Agreement on Net Fiscal Assets’ (ANFAs) and the Securities Market Programmes’ (SMPs) for growth projects, conditional upon positive enhanced surveillance reports, will close the investment gap and will enhance even more debt sustainability.

All of this significantly changes the Debt Sustainability Analysis (DSA) parameters, and of course, the primary surpluses’ targets.

I think we will have a positive outcome on this issue in 2020. Conditions are maturing.

GIG: You are a recently elected government but New Democracy was in power not too long ago and you have served at the Finance Ministry before. What will New Democracy do differently this time round?

Staikouras: Political and economic conditions are completely different today from those back in 2012.

We have political stability through a clear majority in parliament. We have gained trust and credibility through delivering growth-enhancing structural reforms and achieving fiscal discipline.

We found common ground with Greek society that matured significantly and realised that populists, when they come to power, don’t offer any real solutions to real problems. In any case, if New Democracy had continued its governance in 2015, we would have tried to move forward with a plan similar to the one we are implementing today.

GIG: Once your time at the Finance Ministry is up, what is the one thing that you would like to leave behind?

Staikouras: A country with a strong voice in Europe, equal to other EU Member States.

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