Let’s look at “austerity” in
Greece, where the government must certainly be under the greatest pressure of
any government today to resolve its financial issues.
In January-May 2012, the central government had revenue of €18.173
billion (this is net of the public investment budget, which is accounted for
separately). It spent €29.243 billion.
In the same period in 2011, the government had €18.358 billion of
revenue, and spent €27.747 billion.
In the same period in 2010, the government had €19.757 billion of
revenue, and spent €25.815 billion. This was before a two percentage
point increase in the VAT in July 2010.
In the same period in 2009, the then-unreformed spendthrift government had
€18.240 billion in tax revenue, and spent €28.850.
For the full year of 2011, the government had revenue of €49.993
billion, and spent €70.135 billion.
For the full year of 2010, the government had revenue of €50.857
billion, and spent €66.932 billion.
For the full year of 2009, the government had revenue of €48.491
billion, and spent €71.815 billion.
That ‘s a lot of
numbers to digest, but it’s worth thinking them through. What do we
One thing I don’t see is: any meaningful decline in government
spending. Spending is higher in January-May 2012 than it was in the same five
months of 2011, 2010, or even 2009.
What about tax revenues? Tax rates have been heading consistently higher.
But, did this produce any extra revenue? Revenues in Jan-May 2012 are in fact
a little lower than they were in 2009 and 2010, before the big tax hikes.
As far as spending goes, there was no meaningful “austerity” in
Greece. Certainly some high-profile services were cut, but this is usually
more of a public-relations tool
than anything. Governments like to eliminate some high visibility but financially
meaningless services to give the impression that
dramatic changes are happening.
We are supposed to believe that the hideous economic contraction in Greece is
due to the intolerable decline in government spending. The country is in its
fifth year of recession, with a 6.9% decline in GDP in 2011. Another
contraction of 6.7% is expected for 2012. Nominal GDP contracted from
€232.9 billion in 2008 to €215.1 billion in 2011.
But, government spending didn’t actually decline. What caused the
economic contraction? In part it is general economic uncertainty, but also,
it is the effects of the large tax rate increases on an already-overtaxed
Apparently, 6,000 businesses have already relocated from Greece to
neighboring Bulgaria. Is that because the government
said that it would reduce spending, and didn’t? Or, is it because of
the increasing tax rates and general environment of chaos and
wealth-confiscation in Greece?
Greece’s population (10.8 million) is a little less than that of Ohio
(11.4 million). Six thousand businesses lost, from an economy of that size,
is a big chunk. Why Bulgaria? For one thing, Bulgaria is a member of the
European Union, with all the free trade advantages that implies. The
Bulgarian lev is reliably linked to the euro via a
currency-board system. In Athens, rumors swirl that Greece will “leave
the euro” and presumably introduce some domestic fiat junk doomed to
devaluation and collapse.
But, best of all, Bulgaria has a flat tax system with a 10% income tax rate
and a 10% corporate tax rate. The VAT of 20% is rather high, but below that
of Greece at 23%.
I’ve suggested that Greece should follow Bulgaria’s example.
Introduce a flat tax system. Right here and now. When Bulgaria did it, tax
revenues actually rose 5.24% in the first year of flat-tax implementation,
compared to the last year of the previous tax system. That’s more of an
increase in revenue than Greece’s government has gotten from all of its
tax-hiking “austerity” attempts. Some of those 6,000 Greek
businesses now camped out in Bulgaria might come home.
Greece’s government should then cut its spending dramatically, to bring
it in line with tax revenues. This is “austerity with growth,”
and it is the same strategy used by Ronald Reagan and Margaret Thatcher in
the 1980s. It would work again today, in Greece.
originally appeared at http://www.newworldeconomics.com/archives/2012/071512a.html
on July 16, 2012.)