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HELLENIC PARLIAMENT Fiscal Adjustment: How Fair is the Distribution of the Burdens? Athens 2014 PARLIAMENTARY BUDGET OFFICE

© 2014 PARLIAMENTARY BUDGET OFFICE Sekeri 1A 106 71 Athens www.pbo.gr ISBN 978-960-560-120-1 Printing and Binding: Directorate of Publishing & Printing Design and Digital Typesetting: Constantinos Pagonis

Table of Contents Targets and the scientific committee of the office ii Welcome address by Athanasios Papaioannou, General Secretary of the Hellenic Parliament iii Preface by Professor Panagiotis Liargovas, Coordinator of the Parliamentary Budget Office iv Acknowledgements vii 1. The apartment building and the index of despair 1 Stavros Zografakis 2. Who Pays Indirect Taxes in Greece? Evidence from the period of the crisis 9 Georgia Kaplanoglou Vassilis T. Rapanos 3. Gender and fiscal sustainability: Are women inevitable victims or agents of fiscal renaissance? 21 Antigone Lyberaki 4. Social emergency and policy responses in Greece 37 Matsaganis Manos 5. Fiscal adjustment: distributional effects of austerity 45 Mitrakos Theodoros 6. Inter-Generational justice: The end of retrospective adjustments? 55 Tinios Platon The Authors 69 i

TARGETS AND THE SCIENTIFIC COMMITTEE OF THE OFFICE The Parliamentary Budget Office was established in the Hellenic Parliament according to the law 3871 of the year 2010, regarding the fiscal management and responsibility. The Office is responsible for the monitoring of the State’s Budget implementation, the assistance to the workings of the two committees of the Parliament (Special Committee on the Financial Statement and the General Balance Sheet of the State and on the Control of the Implementation of the State Budget and the standing Committee on Economic Affairs) and the drawing up and submission to the above committees, of quarterly and annual reports regarding the observance of the fiscal targets, which are set in the Mid- Term Programs of Fiscal Strategy. The Office is framed by the Scientific Committee, which consists of the following members: • Professor Panagiotis Liargovas, Coordinator • Professor Panos Kazakos, Member • Assistant Professor Spiros Lapatsioras, Member • Pofessor Napoleon Maravegias, Member • Associate Professor, Michael Riginos, Member The Committee delivers opinions on issues requested in writing by the Speaker of the Parliament, or, the Office Coordinator, or, the Parliamentary Committees mentioned above and approves the quarterly and annual reports. ii

WELCOME ADDRESS BY ATHANASIOS PAPAIOANNOU, GENERAL SECRETARY OF THE HELLENIC PARLIAMENT This is the first time ever that the Parliamentary Budget Office (PBO) organizes a workshop for the fiscal adjustment and the burden sharing. The PBO operates under the act 3871/2010 and with provision in the standing orders. During the first year of its operation, the office has made significant work. It has an advisory role and provides scientific support to the Speaker of the Parliament and the chairmen of the two parliamentary committees (Special Committee on the Financial Statement and the State’s General Balance Sheet and Control of the State’s Budget Implementation, as well as the Permanent Committee of Economic Affairs). It is the first time in the Parliament’s history that a special scientific committee is being established and provides scientific support to the Parliament (beyond the existing scientific unit of the Parliament). Furthermore, the PBO enjoys full autonomy and reports directly to the Speaker. With the preparation of quarterly and annual reports, the PBO allows everyone in the Parliament to acquire a more complete picture as regards budgetary targets and achievements. This picture might not always be pleasant but the accuracy and knowledge of the real situation is a prerequisite for any effective policy action. Through the reports, members of the Parliament as well as the public opinion and the mass media have better and more complete information as regards the macroeconomic situation. For example, in the third quarterly report of 2013, in addition to data as regards the budget execution, there was an extended analysis and policy proposals as regards the fight against unemployment and recession in Greece and the Eurozone as well as a debt sustainability analysis. The PBO is neither a partisan nor a bipartisan organization, traits that make it a useful and accountable tool for the legislative and the executive power. The Scientific Committee of the Office comprises of academics with high expertise skills and great credentials in the areas of macroeconomics, public economics and monetary economics. The main theme of the PBO workshop is the distribution of burdens and how fair is this in the context of fiscal adjustment. This is an issue that concerns all of us and especially the citizens that suffer mostly from the deep economic crisis and from the unequal distribution of the burdens, to the extent that it exits. At the same time it is an issue that concerns academics and researchers in the field. It is also a crucial subject for policy makers. As we know, without a fair distribution of burdens in the event of a crisis, there will be no social cohesion and without social cohesion it will not be possible to exit the crisis. Greece’s previous experience has shown that in times of crises, inequalities worsen. At the end of the crises, the poor become poorer and the rich, even though they might have not become richer, they -at least- have maintained their income status. Therefore, the challenge is not only how to overcome the crisis, but at the same time, how to achieve a fair distribution of the burdens. If we succeed in both these targets, then we can look to the future with greater confidence. iii

PREFACE BY PROFESSOR PANAGIOTIS LIARGOVAS, COORDINATOR OF THE PARLIAMENTARY BUDGET OFFICE The chapters contained in this volume are based on the papers presented during the workshop “Fiscal consolidation: how fair is the distribution of its burden?” organised by the Parliamentary Budget Office in 19 November 2013. The workshop, which was bilingual (in both Greek and English) took place in the Senate Room of the Hellenic Parliament. Participants included ambassadors from 28 E.U. and O.E.C.D. countries, MPs and members of the Greek government. The interest in the analysis of the distribution of the burdens under a fiscal adjustment program, was triggered by two sources. First from the comments of the members of the Hellenic Parliament, during the presentation of the first 2013 quarterly report of the Office in the Special Committee on the Financial Statement and the General Balance Sheet of the State and on the Control of the Implementation of the State Budget (see www.pbo.gr ), in May 15, 2013. Secondly, several International Organizations (IMF, EU and OECD) have included such remarks in their reports and hence, this issue was open as far as its outcome was concerned. The main question around fiscal adjustment policies is who bears the burden of the adjustment or how the crisis together with the austerity measures affects income distribution. Ideally, recession and the undertaken measures must leave income distribution unaffected or make it more equitable. Equity has various dimensions, including maintaining an adequate social safety net and the provision of public services that allow a level playing field, regardless of conditions at birth. Fighting tax evasion is also a critical component to equity. Empirical research supports that the chances of success of a fiscal adjustment program would be increased by improving the targeting of social transfers and their effectiveness in terms of poverty alleviation, by increasing public expenditure on training and active labor market programs and social transfers like social housing directed to the poor, even by decreasing the VAT rate on necessities. Therefore, the active support of the weaker sections of the society, in times when a fiscal adjustment program is underway can help not only to sustainability of social cohesion but also the success of the adjustment program i.e. sustainable reduction of deficits and debts. The experience of Finland is helpful here: after a major financial and banking crisis in the early 90s, Finland adopted an ambitious fiscal adjustment program, which was extremely successful. Despite expenditures cuts in many sectors, social benefits (such as child allowances, expenditure on active labor market programs, etc.) have been growing by 14% annually. This volume consists of six chapters. In the first chapter, Stavros Zografakis draws a contemporary picture of social changes. The deterioration in social indicators in Greece as a result of the crisis, which is now in its sixth year, has been confirmed with a considerable lag. The dramatic increase in unemployment and the pressure on workers to accept wage cuts in exchange for keeping their jobs have been driving more and more households to despair. The aim of the study is to measure the despair of Greek households, using an index constructed on the basis of raw data from ELSTAT’s Labour Force Survey. The index provides a timely measure, at a quarterly frequency, of the despair of households. It examines how the burden of a fiscal adjustment achieved through wage cuts or job losses can be considered to be distributed “fairly” across households. iv

Georgia KaplanoglouandVasilis Rapanos exploit five waves of Household Expenditure Survey data in order to study the distributional impact of indirect taxes in Greece over the last twenty five years (1988-2011). The radical simplification of the tax system, primarily induced by EU membership, was achieved at a small cost in terms of equity. According to the authors, the recent successive fiscal consolidation packages, adopted in response to the fiscal crisis, involved major indirect tax hikes which significantly increased the indirect tax burden for Greek households. The 2011 indirect tax system appears as the most regressive in the period studied. The impact of the reforms was particularly adverse for vulnerable population groups like families with children (especially the poorer ones). For austerity not to further challenge social cohesion, policy measures have to be planned in a more informed manner. In the third chapter, Anigone Lyberaki seeks to answer questions such as: “Are women the inevitable fated victims of the fiscal adjustment currently underway in Greece? Or could they possibly form part of a solution to the fiscal impasse of the coming decade? Are they part of the problem, or part of the solution?”. Based on her analysis, women are not victims – at least not inevitably. On the contrary, guaranteeing continuation of their activation is the best hope for a fiscal situation viable in the long term; so long as we look a little further than the immediate future. In the next chapter, Manos Matsaganis analyses the role of the country’s system of social protection. He begins by briefly reviewing the most salient aspects of the crisis and the austerity. He then examines the role of the welfare state as a social ‘shock absorber’, and argues that its capacity to mitigate the social impact of the crisis was already seriously compromised before the onset of the crisis. Following that, the author analyses the effects of the crisis on the welfare state in terms of cuts and reforms, including recent efforts to expand social provision and strengthen the social safety net. His paper concludes by discussing prospects for the welfare state in an era of permanent austerity. In the fifth chapter, Theodoros Mitrakos, presents the recent trends and the characteristics of inequality, poverty and living conditions in Greece, emphasizing the distributional effects of the austerity measures adopted during the current economic crisis. To this end, household income from the Greek Household Budget and the EU Statistics of Income and Living Conditions surveys are used. The available data indicate that income inequality and relative poverty has increased during the current crisis, while the composition of the poor population changed considerably. However, the sharp decline in disposable income and the dramatic increase in unemployment have led to a significant deterioration in economic prosperity and absolute poverty, i.e. when the poverty line in real terms remains stable in the pro-crisis levels. According to the author, the system of social solidarity in Greece is flawed and characterized by considerable leaks. A solution could be to establish a universal and at the same time selective measure (on the basis of income), aimed at eliminating extreme poverty and ensuring for all a minimum income and living standard, not necessarily on a compensatory basis. Finally, Platon Tinios, deals with the issue of inter-generational justice. He then poses the question whether time has come for the end of the delivery of overdue bills. According to him, what had been postponed from 1990 appears to have been ventured since 2010 under severe fiscal duress and under the supervision of the Troika. The pension law L3863/10 was the first piece of legislation after the bailout. That was followed by other laws on pensions while the cycle of changes is not yet complete. However it may have been, changes since 2020 add up to a large and sudden adjustv

ment in generational balance. A number of questions can be posed: Is the adjustment complete, or has there, possibly, been overshooting? How much remains in order to regain balance? Is the insurance system sustainable up to 2060? vi

ACKNOWLEDGEMENTS We thank both the Speaker of the Hellenic Parliament, Mr. Evangelos Meimarakis and the General Secretary of the Hellenic Parliament, Mr. Athanasios Papaioannou for their active support in conducting this workshop. We would also like to thank the General Director of International Relations Ms. Panagiota Miliou and the Director of Communication Ms. Margarita Flouda for their substantial contribution in organizing this workshop. We owe special thanks to the discussants of the workshop and to those who honored us with their presence. Finally, the successful completion of this workshop would not have been possible without the substantial contribution of the Parliamentary Budget Office’s Personnel. vii

1. THE APARTMENT BUILDING AND THE INDEX OF DESPAIR ZOGRAFAKIS STAVROS Associate Professor Department of Agricultural Economics and Rural Development Agricultural University of Athens After five full years of deep economic recession (2009–2013) in Greece and well into its sixth year, a turnaround is not yet clearly in sight. Mirroring the dramatic deterioration in economic indicators during that period, social indicators paint a bleak picture too, although this picture emerges with a lag of about two years. We are currently in early 2014 and we know that all social indicators deteriorated sharply until 2012, which saw poverty and inequality soar. This is the last available year for the most common sources of this type of information, i.e. two distinct annual surveys conducted by the Greek Statistical Authority (ELSTAT): the Survey of Income and Living Conditions (SILC) and the Household Budget Survey (HBS), the most recent waves of which reflect household income and consumption for the years 2011–2012. This paper, using a different methodological approach and drawing data from the Labour Force Survey (LFS), which is the most up-to-date source of relevant statistics, seeks to address this timeliness gap and provide a more recent insight into the evolution of social trends. Most importantly, it attempts to gauge, in almost real time, the effectiveness of the various policy measures hastily taken by the government in its effort to alleviate the woes of the recession. To this end, we construct an index that can serve as a tool for a timely measurement and evaluation of alternative policy options. This index can be seen as a leading indicator of the social conjuncture, i.e. an index that signals developments in the various social indicators, similarly as leading economic indicators signal developments in coincident economic indicators. The link between labour market developments, on the one hand, and the social indicators of inequality and poverty, on the other, has been well documented, as many studies suggest that attachment to the labour market is key to preventing situations of poverty, deprivation and social exclusion. The mechanics of this link relate to such aspects as employment, unemployment and level of labour compensation, i.e. wages. From the perspective of unemployment, the continuing dramatic increase in the number of unemployed in Greece over the last six years has far-reaching and even more alarming implications for several parameters other than the unemployment rate itself. For example, unemployment has now hit the core of the social fabric, as the share of unemployed persons who report themselves as “heads of household” has risen sharply during the current crisis. This development should certainly be given particular attention, in view of its relevance for the objectives of stability and social cohesion. The index we have constructed is designed to measure the degree of despair in households of employees and unemployed persons1. It examines how the burden of a fiscal adjustment that is achieved through wage cuts or job losses can be considered to be distributed “fairly” across households. A few words about the construction of the index: The reference group comprises households of employees (wage earners) and unemployed households. That is, it excludes households that do not include at least one employee or households receiving pension income. The reason for excluding households in which at least one member is selfemployed or a pensioner is because the LFS does not capture income from these sources. Therefore, we only consider households with income derived solely fromwages, unemployment benefits, or both. As already mentioned, the index is based on primary data from ELSTAT’s quarterly LFS, conducted on an annual sample of 120,000 households, enabling to obtain information four times a year. The reference period runs from the first quarter of 2009 to the latest available quarter, i.e. the third 1For a more extensive presentation of the index construction methodology, see Zografakis Stavros and Theodore Mitrakos (2012), ”The low-income risk of households of employees and unemployed during the current crisis”, inSocial Policy and Social Cohesion in Greece in conditions of economic crisis, Bank of Greece, pp. 175, June (in Greek). 1

quarter of 2013 which when this article was written, implying a lag of just one quarter. The index ranges between extreme values of zero and one. A value of zero is attached to households reporting that none of their members is unemployed and the monthly wage of each employed member is more than €1,000. A value of one is assigned to households reporting that all their active members are unemployed and none of them receives any unemployment benefit. The latter households are identified as being in a state of absolute despair. The score of each household depends on the individual scores of all its active members. Specifically, each active member scores the maximum value of one if he/she is unemployed and does not receive any unemployment benefit. Otherwise, the score is gradually lower if this member at least receives an unemployment benefit or is employed, and drops further in inverse proportion to the level of his/her labour income. Finally, a member scores the minimum value of zero if his/her monthly wage exceeds the €1,000 threshold. Accordingly, each active member of the household is assigned one of the following values: • 1 if unemployed and not receiving any unemployment benefit • 0.8 if unemployed and receiving an unemployment benefit • 0.6 if employed and receiving a monthly wage of less than €499 • 0.4 if employed and receiving a monthly wage of between €500 and €699 • 0.2 if employed and receiving a monthly wage of between €700 and €999 • 0 if employed and receiving a monthly wage of €1,000 or higher The total score of each household is the average of the individual scores of its active members. Children and economically inactive members in the household (students at all levels of education, soldiers, individuals incapable of work, housewives, etc.) are not taken into account in the calculation of the index. Looking at the evolution of the index2 as shown in Chart 1, we can make two important observations. 1. Between the second quarter of 2009 and the first quarter of 2013, the index of despair was on a constant rise: from 0.186 in Q2 2009, it peaked at 0.410 in Q1 2013, having increased by 120%. The path of the index implies that we have covered 41% of the distance to the point of absolute despair, i.e. the point at which all wage earners would be jobless and without any unemployment benefits. 2. Three distinct periods can be identified in the evolution of the index. In the first period, between Q2 2009 and Q3 2010, the index increased by an average of 2% quarter-onquarter. It seems that in its initial phase the economic crisis did not weigh so heavily on the index of despair. In the second period, until Q1 2013, developments were dramatic, with the index rising quarter-on-quarter by 7% on average. It is worth noting that during a quarter alone, between Q3 2011 and Q4 2011 it increased by as much as during the entire first period. Finally, in the third period, the index showed for the first time signs of stabilisation, remaining almost unchanged at the still high level of 0.405-0.404for two consecutive quarters. By construction, the index can improve if any of the following conditions are fulfilled (all other factors remaining constant): i some of the unemployed persons find jobs; ii some of the unemployed persons who had ceased to receive unemployment benefits are reinstated as eligible for such benefits under the reformed framework; iii the wage of low-paid workers (earning less than €1,000 per month) is raised. Based on the above, we could argue that the strong tourism season of spring-summer 2013, 2The above index is calculated for different groups of households according to the characteristics of the household (e.g. depending on the level of education, age, region of residence, degree of specialization, profession, sector of activity, years of service, nationality, type of employment, etc.). 2

Chart 1: Evolution of the index of despair over time (average value for all households of employees) Source: Calculations based on data from the Labour Force Survey, ELSTAT. when a number of unemployed persons found jobs, even on a temporary basis, and subsequently the parallel implementation of a programme creating community service jobs for the unemployed (prioritizing households with more than one unemployed member) have led to a slight improvement in the index of despair (first condition)3 . On the other hand, the introduction of benefits for the long-term unemployed during this period helps to fulfil the second condition. As the “average” tends to mask extreme values thereby shedding a flattering light on the situation, let us use the metaphor of an apartment building to illustrate what is really going on. The households under review are assumed to live in an apartment building with several floors; the floor on which a given household lives depends on its respective degree of despair. We are particularly interested in identifying those households that are the most in despair, as these are the most urgently in need of social protection. The building has five floors. On the ground floor, there are households with an index of despair of over 0.8. As we climb to higher floors, the index decreases, until finally in the penthouse we find households in no despair at all, since all of their members are employed and receive monthly wages of more than €1,000. The building also has a basement. There we can find people who sleep on sidewalks, households of illegal immigrants, socially excluded people and, generally, parts of the population that are not recorded by surveys or official statistics. As the crisis unfolds, we can see movements in the building, which can be grouped into two types: • The first type of movement is horizontal. This is the case when a household moves into or out of the building. The number of tenants in the building is currently 4.24 million, up from 4 million before the economic crisis, having increased by 240 thousand. This increase reflects cases of households moving into the building as their self-employed members lose their jobs and thus qualify as tenants. There are also flows out of the building, which occurs when a member finds a job as a self-employed or becomes a pensioner. 3The dampening effect that the strong tourism season of 2013 had on the index of despair is evidenced by the evolution of the index broken down by place of residence of households: the index fell markedly in Crete, the Ionian Islands and the South Aegean, all areas with high tourism activity. 3

• The second, and most important, type of movement is vertical, when households move from upper floors and the penthouse to lower floors down to the ground floor. When a household member loses his/her job, when his/her wage is reduced and gradually falls below €1,000, below €700 or below €500, when the duration of unemployment benefits ends and their payment is discontinued, then the degree of despair of the household rises, and the household takes the elevator to a lower floor. When is has lost everything, it ends up on the ground floor of the building. Living on a specific floor is therefore not a given. In the third quarter of 2013, the building is home to 65% of the total unemployed persons in the country, or 855 thousand people, up from 282 thousand before the economic crisis. Specifically, 292 thousand households with a total of 706 thousand members, of which 432 thousand are unemployed, live on the ground floor. That is, more than half of the unemployed persons in the building live on the ground floor. Of these 292 thousand households, 181 thousand have one unemployed member each, 89 thousand have two unemployed members, 15 thousand have three, while the remaining 6 thousand households have four or more. These figures have increased more than five times in just four years. As mentioned above, 65% of the unemployed persons in the country live in the building; the remaining 35% live outside the building, in households which, by definition, include at least one selfemployed member or a pensioner and are therefore better off than the unemployed persons living on the ground floor of the building. On both of the first two floors of the building, the number of tenants has increased. In contrast, upper floors are home to less and less households (gradual pauperisation) due to flows out of the building. For example, the number of tenants in the penthouse has shrunk by 600,000 individuals (or 200,000 households). These households moved to lower floors during the crisis or, if they were extremely unlucky, went right down to the ground floor. Chart 2 shows changes in the structure of the population on the ground floor over time. The colours in the stacked bars denote the different groups as follows: red: unemployed persons not receiving unemployment benefits; green: unemployed persons receiving unemployment benefits; purple: children aged 0-14; blue: economically inactive members (housewives, students, soldiers, persons incapable of work, etc.); and black, at the bottom of each column: employees who support the members of the previous categories. These are barely discernible, almost non-existent. When a household’s index of despair is higher than 0.8, this means that, at best, it includes one employee, who is paid less than €500 a month. At worst, which is the most likely case, all members of the household are unemployed and few of them receive unemployment benefits. There are 706 thousand people living on the ground floor. These households include no pensioners or self-employed, but only few employees, some unemployed persons, children and economically inactive members. Their only source of income therefore consists in wages and unemployment benefits. Employees paid less than €500 (denoted by the black bar in the chart) should “theoretically” provide for all the other members. The proportion of breadwinners to dependents is as follows: For each employee who lives on the ground floor of the building and earns a month pay of no more than €500, there are 100 dependent members; for each unemployment benefit there are 35 dependent members. We realise that here on the ground floor households have no money. They cannot benefit e.g. from a heating allowance, as they cannot afford to buy heating oil in the first place. Rather, they would need a survival allowance or a food allowance. Here the cold can be suffered, hunger cannot. And there are about 120 thousand children under 14 living in these households. Things are somewhat better upstairs (Chart 4). Employees are more in number, and so are unemployment benefits. Of course the unemployment benefit will cease at sometime in the future and the risk of falling back downstairs is high. The income gap from households on the ground floor is no more than €500. As mentioned above, the higher the 4

Chart 2: A visit to the ground floor of the building - households in absolute despair. Evolution of the number of household members on the ground floor Source: Calculations based on data from the Labour Force Survey, ELSTAT. 5

Chart 3: Structure of household members living on the ground floor of the building in Q3 2013 Source: Calculations based on data from the Labour Force Survey, ELSTAT. Chart 4: Evolution of the number of household members living on the first floor of the building Source: Calculations based on data from the Labour Force Survey, ELSTAT. 6

floor, the better the situation. The unemployed persons who live on higher floors are better cushioned by family income. In the penthouse (Chart 5), there are no unemployed, all household members have jobs and earn more than €1,000 a month each. The economic crisis has certainly reduced the number of tenants here too, with some households taking the elevator to lower floors when their members lose their jobs or face wage cuts. The tenants of the penthouse have most certainly suffered reductions in their income, but these changes are not reflected in the index of despair. A decline in the monthly wage from e.g. €3,000 to €2,000 is outside the scope of our investigation. Over the last two quarters (Q2 and Q3 2013), some stabilization can be seen in the index of despair, with a slight decline in the number of tenant son the overpopulated ground floor. Indeed, some households have managed to move upstairs, for the first time since the start of the economic crisis. In figures, this appears to be the case with about 42 thousand household members, including 21 thousand unemployed persons (of which 14 thousand receive unemployment benefits) and 18 thousand children. What households live on the ground floor? Are they known to us? Are they immigrant households? Are these the households that in earlier national action plans on social inclusion had been identified as being at greater risk of poverty, such as: households with an elderly head, households living in mountainous and inaccessible rural areas, single parent households or households with many children, households with low skills, households with disabilities, etc.? According to LFS data: • Το 84% are Greek (only 9% are Albanians) • 66% are male • 47% are married • 33% are aged 20-39, 55% are aged 40-59 and 12% are aged 60+ • 21% have completed tertiary education, 48% secondary education and 30% primary education • 8% of tertiary education graduates have a doctorate or master’s degree • 17% had a job one year earlier and 69% are long-term unemployed • 83% of those who had a job one year earlier were employees • 83% report that they have not rejected any offer of work • 40% live in Athens, 11% in Thessaloniki • just 0.8% have a job and their monthly wage is up to €499 We should keep in mind that the LFS does not record homeless persons or households without a residence. On the other hand, illegal immigrants as a rule are afraid to open the door to strangers and will not respond to surveys conducted by the Hellenic Statistical Authority. The next question would be: how do these households cope? According to responses to the LFS: • 51% depend primarily on people outside the household (neighbours, friends, acquaintances …). • 16% receive some allowance, benefit or small pension (e.g. disability, death, old age …). • Το 8% are supported by other people in the household • the remaining 25% report that they depend on a combination of sources (neighbours, an allowance, relatives, occasional work …) The new poverty does not have the characteristics of the pre-crisis poverty. For example, the proportion of the elderly (65+) and the proportion of pensioners (of any age) who are at risk of poverty have declined significantly. Rather, the new poverty is closely linked to unemployment. Given budgetary constraints, it is clear that government policy should step up its efforts to reduce the adverse impact of the current economic crisis. In this regard, as suggested by the findings of this paper, the main focus should be on the unemployed: in addition to (mostly short-term) income subsidies that help them to better weather the crisis, particular attention should be paid to facilitating their access to the labour market as well as to social services (health, education, childcare, etc.), thereby 7

Chart 5: Evolution of the number of household members living in the penthouse of the building Source: Calculations based on data from the Labour Force Survey, ELSTAT. also reducing the likelihood of long-term social exclusion for some of these people. At the same time, the cost of these policies would be money well spent, as this group represents a potential new enclave of economic precariousness and poverty. Furthermore, it is essential that access to the labour market should be combined with a shift towards higher-quality jobs and to more secure attachment to a well-structured labour market. This could be sought e.g. by establishing, and making accessible to as many unemployed persons as possible, programmes of on-the-job training, retraining and education in the skills required in the new conditions, as shaped by technological change and challenges. In the current period, with limited or no budgetary resources, social protection will be more efficient and effective when it targets more the overall needs of a household rather than the needs of individual members. As suggested by the results of our research, a part of the population took the elevator and were zipped down to the ground floor of the building, without any intermediate stop. These people are currently the most vulnerable. On the ground floor of the building, people have nothing to lose now. Unless of course they have loan arrears, unpaid electricity bills, unpaid taxes… Another part of the population take the elevator and goes down gradually, with increasing despair. If nothing changes, it will not be long before they reach the ground floor of the building. The drafters of the Memorandum were aware of the problem even before the austerity measures began to be implemented. It was for this reason that they set a MoU requirement for the implementation of a pilot income support programme (minimum guaranteed income) by 2014. After this pilot run, it is necessary to roll this programme out nationally. This time we must channel the scarce available resources to the citizens who are facing the most severe difficulties. We all know that in the past only a small part of social resources reached their intended recipients. The most part was lost to mismanagement and ended up in the pockets of people who were not the true beneficiaries. We should not forget that tax evaders steal from the state twice. Once by hiding their incomes and not paying the corresponding taxes, and again, as on the basis of their understated income they take advantage of for social transfers. At present, it is absolutely necessary that resources should be directed at households in absolute despair. The community service jobs programme that gives priority to households with more than one unemployed member is moving in the right direction. But we must not forget that the recession and the problems remain. And the ground floor is suffocatingly packed with despair. 8

2. WHO PAYS INDIRECT TAXES IN GREECE? EVIDENCE FROM THE PERIOD OF THE CRISIS1 GEORGIA KAPLANOGLOU Assistant Professor Economics Department University of Athens VASSILIS T. RAPANOS Professor Economics Department University of Athens 1. INTRODUCTION Throughout Greece’s recent history, indirect taxes have been occupying center stage in financing the public budget. Contrary to what the theory and international experience would predict (Gordon and Li 2009), the share of indirect taxes in total tax revenues has remained very high (around 60 percent), despite the fact that Greece now belongs to the group of advanced economies. Since Greece’s entry to the European Union in 1981, tax increases were used as the primary means to ensure compliance with the fiscal criteria set at the EU level. Very recently, new indirect tax hikes have extensively been used as part of successive bailout packages and associated austerity measures. At the same time, the structure of the indirect tax system has drastically changed. As a result of pressures to remove trade and factor mobility distortions in the unified market, Greece reformed its indirect tax system, replacing a complex system of indirect taxation, with highly differentiated tax rates, with an increasingly simplified and uniform system of taxation. The present study aims at exploring the distributional effects of these tax reforms which have affected both the structure and level of indirect taxes. We do so by using microsimulation modeling and data from Household Expenditure Surveys covering the 1988-2011 period, namely the surveys conducted in 1988, 2002, 2005, 2008 and 2011. The choice of years is dictated both by expediency and data availability. 1988 is one year after VAT was introduced while many hangovers from the protectionist and overly complex indirect tax system of the past still remained. By 2002 the major indirect tax reforms simplifying the tax structure had been completed and Greece was part of the eurozone. In 2005 existing fiscal imbalances had triggered the corrective arm of the Stability and Growth Pact and increases in indirect taxes were employed by the Greek government in order to bring the excessive deficit procedure launched by the ECOFIN Council to an end. 2008 is the year before the outbreak of the severe fiscal crisis and therefore serves as a suitable basis against which the impact of the crisis can be evaluated. Finally, the latest available microdata refer to 2011 and by that time, sizable VAT and other indirect tax hikes had been employed as part of successive fiscal consolidation packages. The present paper contributes to the existing literature in several ways. First it is the first study to adopt a longer term perspective in analyzing the distributional effects of indirect taxes in Greece. Given the weight of such taxes in total tax revenues, such an analysis has profound importance both for policy makers and the general public. Second, the paper explores whether the process of simplification of the indirect tax structure sacrificed the goal of equity, thus further informing the discussion on the use of indirect taxes as an effective distributive tool. Third, the paper is the first one to assess the distributional impact of all recent drastic increases in indirect taxes in Greece, therefore improving our understanding of the social impact of the recent severe austerity measures. Moreover, it does so by employing 2011 microdata on household expenditure. This poses a serious methodological advantage, since the economic recession between 2008 and 2011 reached a cumulative -15.1 percent, so that simulating any indirect tax reforms on the ba1This work was carried out at the Department of Economics, University of Athens, Greece, and supported by the Special Account Research Grant 11105. The authors keep the entire responsibility for remaining errors. 9

sis of pre-crisis expenditure patterns could seriously compromise the validity of results. This paper is a summary in English of the paper written in the Greek part of this volume. The interested reader is referred to the Greek version of the paper for a more detailed analysis and also to Kaplanoglou (2014), on which part of this paper extensively draws. The structure of the paper is as follows. Section 2 provides a short description of the level and structure of indirect taxes in the 1988-2011 period. Section 3 describes the data used in the study, as well as methodological choices and caveats. Section 4 explores and compares the distribution of the indirect tax burden among Greek households in the five years under consideration and assesses the effects of indirect taxes on welfare inequality. Section 5 assesses in more detail the distributional implications of major indirect tax increases adopted as part of fiscal consolidation packages after the outbreak of the recent fiscal crisis, while section 6 concludes. 2. THE LEVEL AND STRUCTURE OF INDIRECT TAXATION: 1988–2011 Despite increasing levels of overall taxation over the last 25 years, consumption seems to remain the most important tax base in Greece, contrary to what the theory and international experience would predict (Gordon and Li 2009, Fox and Gurley 2005). Although revenues from indirect taxes account for approximately 2/3rds of government revenue throughout the period under examination, the indirect tax structure drastically changed. Prior to EU entry, the Greek indirect tax system had accumulated a large number of differentiated taxes, designed to meet budgetary targets and to protect domestic producers. As a result of EU membership, VAT was introduced and the indirect tax system was gradually simplified, as many taxes were abolished. By 2011, the VAT and special excise taxes accounted for more than 87 percent of total indirect tax revenues. VAT rates increased in 2005 as part of a major fiscal consolidation package launched by the Greek government at the time. Excise rates in general increased over time, with the exception of a major cut in the heating oil excise tax in 2003. Fiscal consolidation measures adopted after 2009 as a response to the severe fiscal crisis involved major indirect tax hikes in all VAT rates and all excises, most of which more than doubled. 3. METHODOLOGY AND DATA The evaluation of the distributional effects of indirect taxes is based on Household Expenditure Survey (HES) microdata, collected by the Hellenic Statistical Authority (EL.STAT.). The survey covers a sample of around 6,500 households until 2005, while since 2008 it is conducted on an annual basis with a sample of around 3,500 households. Response rates (between 70 percent and 85 percent) are in general higher than those in other European Union countries (Eurostat 2008). Since 2005, household design weights are applied by EL.STAT in order to account for imperfections in the sample and non-response bias, following the Eurostat methodology (Eurostat 2013). Expenditure is recorded at a highly disaggregated level (covering several hundreds of commodity groups). Indirect tax payments are calculated by applying nominal tax rates (of e.g. VAT or excises) on household expenditure on the respective commodities, implicitly indirect taxes are fully shifted to consumer prices. Assessing the distributional impact of taxes requires a ranking of households in terms of welfare, which is not directly observable. We have chosen consumption over income as a better approximation of welfare both due to the practical limitation that income is severely under-reported in the Greek HES and on the basis of theoretical arguments. Such arguments suggest that consumption is a better measure of ‘life-cycle’ or ‘permanent’ income than current income, which may be subject to short-term fluctuations (Friedman 1957, Browne and Levell 2010). A further complication is that the HES records current expenditure rather than current consumption. The two notions may differ substantially for consumer durables, such as home repairs, cars and refrigerators. Such goods are purchased infrequently and provide their services to a household for a time period much longer than the one covered in the HES. Therefore, a household might appear, for example, in the top decile of the expenditure distribution because it happened to purchase a car during the week it was surveyed. We therefore measure welfare by the household’s expenditure on all nondurable items (McGregor and Borooah 1992, New10

bery 1995, Newbery and Révész 2000). Household non-durable expenditure has been deflated and adjusted for differences in household size and composition using the modified OECD equivalence scale (Hagenaars, de Vos and Zaidi 1994). To sum up, households are ranked by equivalent expenditure on non-durables for the assessment of the distibutional effects of indirect taxes, while the calculation of inequality measures is derived by assigning equivalent household expenditure on non-durables to each equivalent member. 4. DISTRIBUTIONAL ASPECTS OF THE INDIRECT TAX SYSTEM: 1988–2011 Throughout the period up to the fiscal crisis, the total burden of indirect taxes has remained surprisingly stable at around 11.5 percent of total household expenditure, despite extensive reforms in the structure and rates of indirect taxes. However, the distribution of the indirect tax burden across households at different welfare levels has changed. Figure 1 shows how the share of household expenditure paid in indirect taxes evolved across deciles of households during this period. The simplification of the indirect tax system (roughly approximated by the 1988-2002 period) seems to have benefitted wealthier groups, since the tax share rose in the lower half of the welfare distribution and fell among richer deciles. The opposite pattern is detected between 2002 and 2005, though much less pronounced. Between 2005 and 2008 the indirect tax burden appears to have levelled off across the household welfare distribution, suggesting that the increase in petrol excises and the decrease in stamp duties on rents in this period had broadly offsetting effects. Looking at the twenty year period before the fiscal crisis (1988-2008), Figure 1 suggests that households belonging to the lower half of the distribution ended up paying a slightly higher share of their total expenditure on indirect taxes, while such payments have fallen in increasing proportions among richer households. The fiscal crisis and associated austerity measures signify a drastic increase in the indirect tax burden which stands at around 14.5 percent of household expenditure in 2011. Between 2008 and 2011, the rates of practically all indirect taxes were raised, while the share of revenues from such taxes in GDP significantly increased during the same period. Middle-income households now appear to bear a relatively higher burden from indirect taxes. Considering the whole period since 1988, the effect of the indirect tax hikes since 2008 dominates; indirect tax payments in 2011 represent a distinctively higher share of household expenditure compared to 1988 throughout the income distribution. However, the increase is not uniform. The poorest 20 percent of households have witnessed an increase in indirect taxes of around 3-4 percent of their household expenditure, while for the 20 percent wealthiest households such increase is under 2 percent (see Figure 1). The pattern of indirect tax payments by commodity group in 2011 appears in Figure 2. This figure shows the cumulative distribution of tax payments at a commodity level, where taxes have been ranked in order of regressivity. It becomes apparent that there is a clear grouping of regressive taxes, namely those on food, tobacco, housing (which includes heating oil) and communication. In fact, indirect tax on food is the single most regressive tax, while taxes on clothing, recreation and restaurants are clearly progressive, suggesting that the consumption of the latter has acquired more luxury character. It is also worth noting that taxes on health are progressive, since VAT was introduced in private hospital treatment. 4.1 THE EFFECT OF INDIRECT TAXES ON INEQUALITY One way to assess the effect of indirect taxes on inequality is to measure the change in inequality induced by the existing tax system vis-à-vis a tax system of uniform equal-yield taxes applying to all goods and services. We employ several inequality measures, i.e. the well-known Gini index, the Atkinson indices for values of inequality aversion of 0.5, 1 and 2, and the two Theil indices, T and N. This is done because different inequality indices reflect different value judgements about the relative importance of the welfare of people in different parts of the distribution. Table 1 presents by how much inequality increases or decreases as a result of the indirect tax system in 1988, 2002, 2005, 2008 and 2011 com11

Figure 1: Evolution of the Indirect Tax Burden by Expenditure Group, 1988–2011 2011 2008 2005 2002 1988 -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Decile 1 Decile 2 Decile 3 Decile 4 Decile 5 Decile 6 Decile 7 Decile 8 Decile 9 Decile 10 Indirect taxes as a % of expenditure Change from 1988 to 2008 Change from 1988 to 2011 2011 2008 2005 2002 1988 pared with a distributionally-neutral uniform equalyield tax. The 1988 indirect tax system appears to have minor distributional benefits over the uniform tax, since inequality declines by 2 percent4 percent. Thus, the simplification of the indirect tax system which took place since then seems to have had adverse redistributional effects. Nevertheless, the increase in inequality is very small and, in fact, if one plotted the relevant Lorenz curves, they would cross, so that neither distribution dominates the other. Some redistributive power was regained by the tax reforms introduced since 2002. The most influential reform in this aspect has been the strong decrease in the heating oil excises by 2003, which is one of the most regressive taxes. The levelling off of the indirect tax burden across the distribution of households in 2008, depicted in Figure 1, is also reflected by the fact that inequality hardly changes if the 2008 tax system is replaced by a uniform tax (see column 4 of Table 1). The tax increases introduced since then had a clearly adverse distributional effect, with all indices suggesting that inequality would increase if the 2011 indirect tax system replaced a uniform tax. In fact, Table 1 suggests that the 2011 system is the most regressive one since 1988. 5. THE DISTRIBUTIONAL IMPACT OF AUSTERITY: A CLOSER LOOK AT THE RECENT INDIRECT TAX HIKES The sharp increase in the indirect tax burden of households as a result of the drastic rise of rates of almost all indirect taxes after 2008 deserves a closer look. Indirect tax rates increased for all commodity groups, yet the increase was not uniform. Certain groups, such as clothing, household goods (durables and non-durables) and recreation, were affected just by the rise in VAT rates. The highest increases are recorded for alcoholic beverages, tobacco and transport (including transport fuel), the excises on all of which almost doubled between 2008 and 2011. Restaurants were moved from the reduced to the standard VAT rate, while there was also a considerable rise in fees on cell phone bills. Hotels benefited from the government policy to boost tourism by transferring hotel services from the reduced to the base VAT rate. The above increases in the tax component of the retail price of various commodity groups do not translate into analogous increases in the tax payments of households, as the latter adjusted their consumption patterns in reaction both to the changes 12