Greek reform proposals — a first review

(Note — this is a rough and ready first cut at an analysis of the leaked version of the “Specific reform” proposals which the Greek finance ministry needs to send to the Institutions in order to make progress on the next tranche of bailout funding. I was very alarmed and disappointed by the proposals and the piece below reflects that, but it should be remembered that this is a leak rather than the official document, and the final proposals might be a lot better)

The letter with the Greek reform proposals has been leaked, via Peter “Scoop” Spiegel of the Financial Times, and it is a … pretty curious document. It is a mixture of the good, the bad and the ugly, with really quite a lot in the second two categories. Admittedly, this document was prepared under extreme time pressure, and in many ways it’s to the Syriza administration’s credit that they are only including proposals that they consider to be deliverable within a short time frame. But even allowing for that, it is quite disappointing; there are very few concrete numbers in here and some of the proposals are actually farcical. Let’s start with the good points.

The Good

Reforms 1 and 2 on the list look sensible. Activating the Fiscal Council and creating some independent monitoring of the budget process will help transparency, and giving it a mandate to comment on political party programs during election campaigns should help reduce the tendency to make undeliverable promises. And the second reform (under the heading “Budget preparation & organic budget law”) looks potentially quite important; the mentions of “ceilings for the various levels of government” and “corrective mechanisms at a quarterly level” need considerable explanation, but it does look as if Syriza is, for the first time in a long time, trying to bring the overall general government budget process under central control. If this could be achieved, it makes a lot of the things that the Eurogroup really wants a lot easier to deliver.

Being generous, Reform 5 — “Immediate Public Revenue Accrual through Online Gaming Services” is also not too bad an idea, albeit that it never feels really good to make the state a little more dependent on gambling taxes. As things stand, online gaming in Greece is regulated under an interim arrangement which doesn’t raise any revenue. Selling the licences for a fee could raise money for the fiscal balance (the document estimates €500m — I have no basis on which to gainsay it, but given the lack of detailed analysis I doubt the Eurogroup will take it at face value), and the provision of legal certainty is probably good for the industry. So count this as a positive too.

Sadly, that’s pretty much the limit of the good points. The other four headings split up between “Not really credible” and “really dangerously bad ideas”. In summary, they consist of

Reform 3: The “onlookers” VAT-evasion fighting scheme
Reform 4: Tax arrears proposal
Reform 6: “Anti-bureaucracy self-informing public sector scheme”
Reform 7: Immediate measures to face the humanitarian crisis

The Bad

Numbers 4 and 7 are both of them really quite thin, given the importance of these areas to the overall program and their centrality to the Syriza election platform. The humanitarian measures (basically a food stamps scheme, plus 300kw/H of free electricity a month and some rent allowances) have been costed at €200m, which is to be paid for on a fiscally neutral basis. The costing itself must be making some quite aggressive assumptions, as the food stamps scheme alone is meant to cover “up to 300,000 families” at €100 a month for nine months, which would be €270m on its own at full takeup.

But then the financing — well, we have “consumables and general expenditure reductions at each ministry” of €60.9m and €140m of projected savings from “a new system of public tenders”. These are classic examples of projected “waste and inefficiency” savings, which tend to be taken only at a substantial discount in any program negotiations — it’s not that it isn’t possible to sweat the paperclips budget, or to improve competitive tendering, it’s just that delivery on this sort of program is never taken for granted. I don’t think the Eurogroup will treat these measures as fiscally neutral, which means that more funding from spending cuts or tax rises will need to come from somewhere else.

Tax arrears

The tax arrears proposal is very difficult to understand, which is presumably why the description breaks off into a Q&A format which isn’t used anywhere else in the document. The underlying problem here is a serious one that does need to be addressed — Greece has a massive balance of uncollectable tax arrears, many of which date back decades. As far as I can understand it, the proposal is to write off some of them (including all of the older ones), and to bring in a scheme whereby the collectable element are paid back in 100 monthly installments, with incentives to front-load the payments and partial forgiveness of the fines and surcharges.

It’s not really a bad idea itself, but it looks very like a proposal that the Eurogroup have already rejected, and so it really needed to be set out in a lot more detail and to deal with the specific objections that were raised, rather than making broad assertions about moral hazard. It also has to be said that the punishment for missing a payment under the instalment plan is to be put back into the normal tax collection process, which in context doesn’t seem like much of a stick.

So these two are basically not too bad, but really handled and presented with a degree of care and coherence that doesn’t reflect well on the finance ministry and reinforces the perception that the Syriza government aren’t ready for prime time. But then we have the remaining two …

The Ugly

Reforms number 3 and 6 are not so much “not ready for prime time” as “not ready for an after-midnight slot on local AM radio”. They are both unutterably terrible ideas.

The Snooper-Force

The “onlookers” scheme basically involves the recruitment of “students, housekeepers and even tourists”, with a brief period of basic training, on short term two month contracts to act as undercover tax inspectors, wired for sound and video to gather data on VAT and cash-in-hand fraud. What could possibly go wrong, eh? Apart from the obvious and significant risks to the barely-trained undercover agents, and the political minefield of creating a network of government spies in a society that’s already low on trust, this is actually quite a bad idea as tax policy.

For one thing, Syriza (correctly) fought tooth and nail against being forced to bring in a VAT increase by the troika. They did so because they (again, correctly) viewed it as a regressive and contractionary tax that would worsen the recession. This is all correct. But, from an economic rather than moral point of view, what’s the difference between an increase in the rate of VAT and an increase in the collection rate of VAT? It is true that in the long term, the Greek informal economy is a drag on productivity and needs to be brought into the formal sphere. But it’s equally true that right now, that informal economy is all that’s keeping a lot of Greeks above water, and this is the worst possible time from a cyclical point of view to be driving it out of business.

There’s always a worrying misconception among designers of these kind of programs that tax evasion is a sort of “free money” pot, which can improve the fiscal balance without any other economic effects whatsoever. This isn’t true — it’s closest to being the case for things like offshore accounts and global transfer pricing schemes, but for things like VAT, the tax take is coming straight out of the domestic economy and so will the production of “Snooper Force” if it gets off the ground.

And for another, the political economy of this move is pretty problematic too. For the whole of the February negotiations, it seemed that the Syriza tax evasion proposals were aimed at “oligarchs” and at the transfer pricing policies of big shipping companies. Now that we’re coming down to specifics, they are instead looking for cash-in-hand workers, cigarette kiosks and nightclubs. Although kiosks and nightclubs are often surprisingly profitable, cash-in-hand workers include some of the poorest people in Greece; this measure is likely to be very regressive in its impact on the population. Not only are the local electorate going to notice that Big Cigarette Kiosk is not exactly the Onassis family, the Eurogroup partners, in my opinion, are highly likely to take the message that Syriza has given up on the real oligarchs because it’s discovered that the big gains it was hoping for aren’t actually achievable. Maybe the idea is to get the easy wins first and tackle the oligarchs later, but if so this really needs to be explained more clearly.

The worst idea of them all

And then we get to the worst of the lot — Reform number 6. I can’t really do this one justice, so here are the bare words of the proposal

“The government intends to introduce legislation that bans public sector units from requesting (from citizens and businesses) documents certifying information that the state already possesses (within the same or some other unit).

“The standard argument against such legislation is that it can only be activated once the various public sector departments/offices are fully digitized. The Greek authorities disagree and, in fact, believe the opposite to be the case: First we need to legislate that public servants are banned from requesting from citizens and business information that some other department possesses and only then will there be a sufficient ‘drive’ within the public sector to digitize”

In other words, “Break it, and they will come”. As an approach to motivating public sector reform, it’s something that even the wildest fringes of Reaganism would balk at. If put into practice, this would give any Greek citizen or business faced with a regulation they didn’t like a cast-iron method of stopping any enforcement process in its tracks for a time period equal to the completion horizon of a large and complex cross-government IT project (ie, more or less for ever). Tied up with this scheme would be the “voluntary” introduction of a citizens’ ID card with a chip carrying all relevant personal information except medical records, which also looks like a massive and unworkable scheme, but in context is hardly material.

I think it’s going to be very difficult for the Eurogroup (or the IMF, or the ECB) to accept this document as a basis for negotiations. Everything that’s sensible lacks details, while the things that have details in them make you wish they didn’t. It looks like a missed opportunity. There might be some kind of brinkmanship going on here, in which the document has been presented in the style of “The Producers”, in order to be rejected and trigger another round of negotiations. But, set against the alternative hypothesis — that an inexperienced and badly prepared new government have produced a poor quality and badly prepared proposal — I’m inclined to use Occam’s razor.