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Enhancing fiscal viability.

Putting public finances on a sound footing is a major policy challenge for Greece. The high public debt, at about 100% of GDP, and repeated fiscal slippages limit the room for counter-cyclical fiscal policy and a large pension burden is bearing on longer term fiscal sustainability. These factors have been reflected in a rise in sovereign interest rate spreads vis-a-vis Germany. Credible fiscal consolidation should focus on both revenue-enhancing and expenditure-containing measures. Tax collection is low in terms of GDP, pointing to considerable scope for raising revenue by fighting tax evasion and eliminating many distortionary tax exemptions. This calls for strengthening tax administration. To deal with frequent spending overruns, expenditure management should be improved through the timely implementation of the ongoing reform of the budgetary process and the rapid introduction of a more modern and transparent public accounting system. Reforms are also needed to rationalize public wage policies to contain the growth of comparatively large personnel outlays. There is also room to improve efficiency in public administration, and to reduce subsidies to public enterprises and other government entities. Additional reforms are also needed in the pension system, which is one of the most generous in Europe, and health care (Chapter 3) to ensure longer term fiscal sustainability.


Enhancing fiscal viability is imperative to restore room for manoeuvre for stabilization policy, reduce interest-rate spreads by strengthening market confidence, and meet rising social and economic challenges. The high public debt needs to be reduced and policy credibility improved by sustained fiscal consolidation. The prospective reduction in European structural funds in the coming years reinforces the need for putting public finances on a sounder footing. As fiscal slippages stem from both expenditure overruns and revenue shortfalls, consolidation should focus on both revenue-enhancing and expenditure-containing measures. This chapter discusses revenue collection and expenditure management, and fiscal challenges posed by population aging.

Enhance revenue performance with a special focus on tax evasion

Several factors contribute to tax evasion

The efficiency of the tax system could be improved (Table 2.1). The efficiency of several taxes in Greece is below other countries in the euro area with similar, or even lower, statutory rates. Low efficiency reflects large tax evasion and design problems with tax exemptions (Chua, 2008). This has contributed to a low overall tax-to-GDP ratio, which at about 31% of GDP is about 4 1/2 percentage points below the OECD average (Figure 2.1). This ratio has worsened in recent years despite buoyant activity. The overall tax burden peaked at 34% of GDP in 2000, after efforts to reduce the government deficit before joining the euro area, and recent policy initiatives to reduce the tax burden explain only part of the lower collection.


Weak tax collection is associated with a large informal economy (Danopoulos and Znidaric, 2007), which has been estimated to be between 25% and 37% of GDP. (1) While these findings should be treated with caution due to the definitional and measurement difficulties involved in assessing the extent of informal (shadow or underground) economies, Greece usually ranks high in relevant international comparisons. Recent estimates by Schneider (2009) suggest that the shadow economy accounts currently for around 25% of GDP, down from 29% of GDP at the beginning of the decade, but still the highest among the 21 OECD economies examined (2) (Figure 2.2).

Informality is a multi-dimensional phenomenon, and is generally explained by a high level of taxation, excessive regulation, inefficiency of the public sector (higher efficiency increases the expected penalty for operating underground) and corruption (Schneider and Enste, 2000; Bovi, 2002). As Tatsos (2001) highlights, tax evasion constitutes one of the most important factors for engaging in underground activity. Incentives for this arise from many sources, including a high tax wedge on labour income which exceeds the OECD average, especially in the case of married couples with children (Figure 2.3).


Institutional weaknesses and cumbersome regulations can also be at the heart of tax evasion. (3) Capo Servera and Moschovis (2008) highlight tax administration inefficiencies as the most important factor hampering tax collection since the beginning of the decade. Katsios (2006) shows that Greece exhibits "pronounced signs of a transition economy" in terms of the high level of regulation, which, in turn, can lead to high incidence of bribery, high effective taxes on formal-sector activities, and a sizeable underground economy. Greece fares poorly in the World Bank's governance indices of "control of corruption" and "rule of law" (used as proxy of efficiency of public sector) (Figure 2.4). OECD indicators also point to a high degree of restrictiveness in product market regulations (Figure 1.16) and a stringent employment protection legislation (EPL), (4) which are costly to satisfy and can therefore stimulate informality. Examining the nature of the underground economy in OECD countries during the 1990s, Bovi (2002) concludes that institutional failures can be a more important stimulus of underground economy in Southern European counties (Greece, Italy, Portugal, Spain) than taxes, pointing to the relatively high levels of corruption, the weakness of the legal system and strict labour market regulations observed in these countries.

Tax evasion is also facilitated by a complex tax system and imprecision of the underlying laws. The tax code is amended frequently, which increases compliance costs and creates incentives for evasion (Flevotomou and Matsaganis, 2007). Recurring tax amnesties have undermined the credibility of the system by providing an incentive for tax payers to delay and eventually evade taxes. Repeated extensions of the deadlines for tax settlements may also encourage delays in payment (Bank of Greece, 2009; Athens Plus, 2008). Tax evasion is further stimulated by the existence of legal deadlines ("limitation of action by lapse of time") that allow for debts to be written off. In 2007, EUR 3.5 billion (around 1.5% of GDP) in taxes were written off, owing mainly to the expiration of the legal deadline for collection, according to the 2007 State Audit Council Report (State Audit Council, 2008).


The economic structure also affects tax compliance. The self-employed, who can avoid taxes more easily than employees and pensioners, account for more than 30% of the population. Flevotomou and Matsaganis (2007) tentatively estimate a 10% income under-reporting for the purposes of tax evasion, which results in a 26% shortfall in tax revenues. (5) There is a striking difference in estimated under-reporting rates for income from dependent employment and pensions (with a rate around zero), self-employment (24%) and especially agriculture (56%). Besides a shortfall in revenue, the study points to adverse distributional effects of tax evasion in terms of inequality, poverty and progressivity.

What needs to be done

The government has introduced several measures in recent years to reduce tax evasion by simplifying the tax system, broadening the tax base and strengthening tax administration (Box 2.1). These are steps in the right direction and evidence to date is encouraging. Recent estimates by Capo Servera and Moschovis (2008) indicate that the reforms implemented since early 2004 have reduced the impact of inefficiencies in tax administration and enforcement. Chua (2008) also highlights the positive outcomes from the intensified administration efforts to increase tax compliance, mainly through more frequent tax audits and the cross-checking of information on tax liabilities.


Further action is needed, however. Uncollected government revenues, according to the latest state audit council report, stood at EUR 31 billion (or 13.6% of GDP) in 2007, and the shortfall was 22% higher than in 2006. The undershooting of the 2008 budgeted revenue target from tax settlement points to continued inefficiencies in tax collection. Another reason, according to the latest Stability and Growth Programme (SGP), can be liquidity constraints caused by the international turmoil and the short deadlines for settlement (Ministry of Economy and Finance, 2009).

Greece has limited options for raising revenue by hiking tax rates, as current statutory rates are not low. The need to keep the tax system competitive, given the increasing mobility of tax bases, restricts the room for increasing revenue through higher tax rates, which would also encourage tax evasion. There is limited scope for raising payroll taxes because of Greece's already high tax wedge (Figure 2.3). Consumption-based taxes, such as the VAT, despite being regressive, have the advantage of being neutral towards saving and investment decisions and creating fewer disincentives to work in comparison to labour taxes (OECD, 2007a). Although Greece's VAT rate is broadly in line with OECD average, the collection rate is low, which suggests that policy should focus on broadening the tax base.
Box 2.1. Tax Reform: An overview of recent initiatives

Greece has implemented a number of reforms since 2004 to improve
the functioning of the tax system and make it more competitive by
international standards. A focal point of the reforms is the
reduction of tax evasion (OECD, 2007a). Specific measures over the
period 2004-07, include: i) the introduction of VAT on new
buildings, which should help reduce the occurrence of informal
activity in the construction sector; ii) reductions in income tax
burdens for individuals and businesses, through gradual declines in
tax rates and a restructuring in tax scales; and iii) an upgrading
of TAXIS (the primary tax information system of the Ministry of
Economy and Finance) through the electronic cross-checking of tax
data, and the restructuring of audit services.

A new law on tax evasion was approved in November 2007 which
provides for the establishment of a National Council (already in
operation) to direct efforts at fighting tax evasion. The law also
improves the structure of tax administration and provides tax
incentives for taxpayers to collect receipts for services as a way
to reduce income under-reporting (the latter provision was put into
effect on 1 August 2007). It further provides incentives for the
disclosure of delinquent behaviour on tax matters. To curb
widespread tax evasion in the petroleum market, in 2008 the
government equalised the tax rates for home heating oil with that
for diesel fuel used for transportation. (1) Efforts have also been
taken recently to promote the public's awareness of the negative
impact of tax evasion.

The tax reform in 2008 included further cuts in personal income
taxes, reducing the two middle marginal rates of 29% and 39% by
four percentage points between 2007 and 2009, to 25% and 35%
respectively, and measures to broaden the tax base, such as the
imposition of a 10% tax rate on dividends and capital gains.
Moreover, the reform package abolished the tax-free threshold for
income up to EUR 10 500 for self-employed, applying instead a 10%
tax rate up to this amount. The tax-flee bracket was restored,
however, in the wake of the economic crisis.

Finally, the complexity of the tax system was reduced through the
simplification of property taxation. A unique property holding tax
was introduced in 2008 which has replaced a variety of taxes levied
on real estate under the previous regime. Moreover, taxes on real
inheritance for close relatives have been abolished and were
replaced by a uniform 1% duty on property transfers. (2) First
homes (up to 200 [m.sup.2]) were exempted originally from either
tax. In view of the difficulties in implementing the unified
property tax scheme, and to render the scheme simpler and fairer,
the government abolished in early 2009 the exemption for primary
residence. Instead, a tax-free threshold was introduced which
varies according to the marital status of the property holders and
is calculated on the basis of the legal value of all property

(1.) To moderate the adverse consequences, the new system of taxation
has been accompanied by a programme of compensating households.

(2.) Regarding shares and businesses, a separate tax ranging between
0.6% and 2.4%, is applied depending on the type of transfer and the
of degree of relatedness.

VAT revenue could be improved by moving to a simpler structure. Recent estimates by Eurostat suggest that a larger share of private consumption in Greece (around 9%) than in EU 27 (an average of just over 5%) is excluded from taxation at the standard VAT rate, although this may also reflect tax evasion (Eurostat, 2009). There are currently six positive rates (plus a zero rate for exports). (6) The VAT rate structure could therefore become more uniform and the list of goods and services that are eligible for reduced rates could be shortened. A simple VAT structure would also bring Greece closer to the international practice (Chua, 2008).

The income tax base could be broadened by eliminating many of the remaining exemptions and deductions. Consideration should be given to abolishing the tax-free threshold for the self-employed (EUR 10 500), which was restored in early 2009 in response to the slack in activity, to ensure that self-employed pay is taxed fairly (Box 2.1). There is also some scope for exploiting property taxes more effectively. Greece collects 1.5% of GDP in property taxes, around half a percentage point below the OECD average. To raise revenue, exemptions could be reduced and legislation simplified by, for example, making rates uniform between residential and business property. The rapid development of a national registry for land and buildings, aiming to cover two-thirds of the country's population by 2012, is an important pre-condition for effective property taxation.

Efforts to strengthen tax administration need to continue. Particular emphasis should be placed on enforcement to ensure that those in the informal economy are brought into the tax net. Reforms should focus on improving audit activities through the hiring of better qualified personnel, greater promotion possibilities for auditors, better infrastructure, and the development of a comprehensive system of exchanging information (Capo Servera and Moschovis, 2008). The recent introduction of a unique social security identification number for each insured person is a positive step toward facilitating data collection and information exchange, while also promoting a better co-ordination between pension fund administrators, the labour inspectorate and the tax authorities. Granting auditors easier access to taxpayers' bank account information would also be advisable. The authorities should experiment further with the use of private services in tax administration, starting with the collection of arrears; they already have employed private-sector knowhow and technical support, although the collection task will continue to be the responsibility of official tax offices. Consideration should be given to employing more indirect estimation methods for taxable income.

In addition, repeated tax amnesties should be terminated and the tax system made more transparent. Since 2004, there have been three tax amnesty laws. International experience of failed recurrent holidays, as in the case of Italy, also highlight the need for avoiding such a policy. Given the sizeable amount of write-offs each year as a result of the expiration of the legal deadline for revenue collection ("limitation of action by lapse of time"), the government should consider increasing the length of, or even removing, such deadlines. More generally, the tax system needs to become more stable and transparent. This would reduce the cost of compliance to be borne by taxpayers and that of tax administration, which is among the highest in OECD (Figure 2.5).

Tax evasion would also be reduced by unifying the administration of taxation and social security contributions. The creation of a national social security register, mentioned above, is a welcome initiative in this regard. Centralising the collection of taxes and social security contributions under the control of a single authority would also be advisable, facilitating cross-checking of information. In addition, progress needs to be made in abolishing the large number of the taxes collected on behalf of third parties which, as discussed in previous Surveys, distort resource allocation and reduce the transparency of the tax system. These are earmarked levies that fund various institutions such as the pension funds of lawyers and engineers. Such levies constitute a mix of taxes, duties, charges, contributions and fees that have been introduced by the central government in favour of different authorities or private entities. They are usually collected directly by various agencies such as banks and public utilities, and distributed to the final recipient. Third-party taxes represent an important cost in terms of revenue raised, as they are often not registered in the state budget (OECD, 2001).


Efforts to improve revenue performance should, however, go beyond the realm of tax policy. As discussed in Chapter 3, there is an extensive informal economy in the health sector. Moreover, the complexity and fragmentation of the pension system reduces incentives for compliance and complicates enforcement, leading to sizeable contributions' evasion. To the extent that a more business-friendly regulatory framework in product and labour markets affects informality, the payoff to policies in this area could be large in terms of fighting evasion.

Achieving better control of primary expenditure

A shift in the composition of fiscal adjustment towards increased reliance on permanent expenditure retrenchment is essential for sustainable consolidation. Fiscal consolidation was partly unsuccessful in the past because it tended to rely on temporary measures (one-offs) (Table 1.2). In contrast to developments in the euro area, improvements in the primary structural balance tended to be due to higher receipts, while structural expenditures also rose. Credible consolidation will require policy efforts in several areas, namely personnel outlays, public administration, and financial assistance to public enterprises and other government entities. Public expenditure management also needs to be improved. Long-term sustainability further hinges upon a forceful implementation of structural fiscal reforms in pensions (discussed below) and health care (Chapter 3). Delaying fiscal consolidation efforts, according to the previous Survey, would have substantial long-term costs in terms of higher taxes and additional debt service obligations. It would also compromise the use of automatic stabilisers during a cyclical downturn (OECD, 2007a).

Restraining personnel outlays

The government should aim at moderate public-sector pay increases. Spending on compensation for general government employees exceeds the euro area average, a gap that has widened sharply over time as Greek public sector payroll have risen in relation to GDP while it has declined in the euro area (Figure 2.6). On the basis of available data, the difference appears to largely reflect developments in real wages per employee, which increased by 3.1%, on average, over the 14-year period 1995 to 2008, compared to only 1 1/4 per cent in the euro area. Developments in staffing, however, may have also played a role, given the faster growth of public sector employment in Greece over the period (1.9%) compared to the euro area (0.3%). (7) Sound wage policy in the public sector (including public enterprises) would also help to contain wage pressures, given the sector's signalling role on private wage bargaining. (8)


As discussed in Chapter 1, the 2008 update of the Stability and Growth Programme (SGP) entails a number of expenditure-reducing measures aiming to safeguard the government's medium-term fiscal targets, including a prudent public wages policy and a new policy of partial replacement of retirees in the public sector. These measures go in the right direction of containing personnel outlays. Growth in central government average earnings is estimated by the Bank of Greece to slow to 4.7% in 2009, from 8 1/4 per cent in the previous year, although this also reflects a wage freeze for public servants announced in early 2009 by the government.

A sustained rationalisation in public pay would require a reduction in the wage drift through the rationalisation of the special benefits received by public sector employees. This is even more important in light of the announced policy of partial replacement of retirees in the public sector. In the past, the relatively fast rise in employment tended to push wage drift downwards by increasing the share of younger, lower-salary civil servants in total government employment, contributing thereby to a containment of increases in wages per employee. The wage drift accounted for around half of the increase in the wage bill in 2008. There are currently more than 40 general benefits granted to civil servants, topped up by over 200 special benefits, the format of which differ even in the case of employees working in the same public entity (Noti, 2009). This makes the payment system cumbersome and difficult to manage, in addition to increasing government primary spending. The establishment of a central authority for wage payments will be a positive step towards enhancing transparency and ensuring a better monitoring of earnings' developments in the public sector. The government should proceed with its plan to rationalise special benefits for new employees in the public sector by introducing in 2010 a common scale of remuneration for similarly qualified employees independently of the public entity they work in. The ongoing dialogue with the union representing civil servants is a welcome step toward turning the plan into reality.

Progress in public administration reform needs to continue

Despite steps taken in recent years towards modernising public administration, there is still ample scope for improving performance. As discussed in the previous Survey, public administration in Greece absorbs a much higher share of government expenditure than in most other OECD countries, with no evidence that the quantity or quality of services provided are superior (Figure 2.4, OECD 2007a). This points to a large potential for containing expenditure through increased efficiency. Public sector efficiency analysis by Afonso et al. (2003) concludes that Greece could have achieved the same level of output employing only 73% of the inputs it is currently using. Previous Surveys highlighted the need to address the problem of over-stating and to raise productivity in the public sector, which are critical to improve the quality of service delivery. Over-staffing may have resulted from a number of factors, including high demand for public sector jobs due to their secure nature and favourable social coverage, and rigidities within the system, which constrain the re-allocation of existing public employees among different public sector activities (OECD, 2002). The problem of overstating has been exacerbated by a lack of a strong system of performance evaluation in the public sector and inadequate incentive mechanisms.

The new policy of a partial replacement of retirees in the public sector, envisaged in the latest SGP, is a step in the right direction and needs to be vigorously enforced. Improvements in human resource management are also expected from the introduction of a new Code of Civil Servants in 2007, which should be implemented without delay. The Code aims inter alia at a stronger system of performance evaluation, tighter recruitment procedures and increased mobility of public sector employees, which address inefficiencies in the use of human capital. A new system of selection for heads of units in public administration based on specific objective criteria (such as professional qualifications, administrative working experience, and abilities and expertise assessed on the basis of an interview) is expected to increase impartiality and transparency in the selection process. In addition, the new system can lead to a better match between skills and responsibilities. Ensuring high performance of civil servants would also require a strengthening of the incentive mechanisms by linking salaries to productivity, giving department managers greater autonomy to reward achievement. Finally, better designed measures to help the redeployment of public workers to functions which are more needed are essential for achieving a more efficient allocation of existing resources.

The quality of the services provided by the public administration should also be raised. Measures introduced in recent years to make service delivery progressively more user-friendly, notably, the establishment of "one-stop shops" (Citizen Centres) for administrative services and changes to lighten administrative procedures for business, are a step forward. However, administrative procedures remain burdensome by international comparison. According to the World Bank Doing Business 2009 report Greece has one of the least business-friendly regulatory environments in the OECD area in terms of starting/closing businesses (World Bank, 2008). A simplified framework would not only help to establish a business, but would require fewer resources to administer. The government's goal to reduce the administrative burden by 25% by 2013--in line with the EU's target--is therefore welcome and should be implemented rapidly. As a step towards achieving this target, the government has established a High Level Working Group to monitor and make recommendations on administrative burden measurement (Ministry of Economy and Finance, 2008a). The determination of the authorities to improve the efficiency of public sector is further evident in the Operational Programme on Public Administration Reform for the period 2007-13, including a B-year project signed with the OECD to provide Greece with international best practices as benchmarks to support its public administration reform efforts.

Public administration reform should also focus on ensuring that policies are implemented fully and efficiently once the legislation has been passed. The gap between legislated and implemented reforms is large in a number of areas, as highlighted in the previous Survey. The establishment, in 2006, of an appraisal system for the issuance of new legislation is a commendable initiative towards a better and less complex legislation. A circular was issued by the Prime Minister in July 2006 (Y190/18-7-2006) focusing on "Legislative policy and assessment of the quality and effectiveness of legislative and regulatory provisions". The quality assessment is based on specific criteria, such as the necessity of the legislation, its clarity of expression, its harmonisation with the EU and International Law, and its efficiency and effectiveness. Quality evaluation reports are obligatory for every primary law and secondary regulation and will be repeated following the enforcement of each law, to evaluate its implementation (OECD, 2007a). During the two-years after the introduction of the appraisal system, 25 Regulatory Impact Assessments were prepared covering 12.6% of newly enacted laws. The quality of the evaluation reports (Regulatory Impact Assessments), however, as the authorities recognise, needs to improve further. Hatzis and Nalpantidou (2007) advocate a narrower impact assessment analysis focusing mainly on major laws and regulations. This can be achieved by putting in place a preliminary simple impact assessment of alternative regulatory options to be followed by a more comprehensive evaluation of the benefits and costs of the selected option. The appraisal system could also be more transparent, with the outcomes of evaluations made available to the public, which would boost accountability.

Enhance budgetary control over public enterprises and entities

Control over spending by public enterprises needs to be strengthened. Such enterprises burden the budget not only with the state grants they receive to finance their deficits, but also by requirements for capital injections and loan guarantees. According to official estimates, the budget burden of public enterprises amounted to around 0.8% of GDP in 2007. The poor financial position of the public enterprises is often related to overstaffing and high labour costs, pricing policies that are not based on commercial criteria and a lack of updated technologies and inadequate infrastructure (OECD, 2007a).

Recent measures to strengthen the performance of public enterprises are welcome. The new framework for the operation of public enterprises initiated in 2005 should increase efficiency and productivity in the coming years. It provides for a closer monitoring of the activities of public enterprises, the introduction of private terms of employment (though solely for new employees), improved governance and the preparation of annual business plans. This has been complemented by a more recent law, enacted in 2008, which links wage increases received by employees in subsidised public enterprises to the financial position of the enterprise and developments in the state budget. Faster progress towards implementing the new framework is desirable.

Efforts should continue to reform or privatise state enterprises. Progress in privatising state-owned enterprises, especially the sale of Olympic Airways in 2009 and the Piraeus Port Authority container terminal in 2008 are significant steps towards addressing budgetary pressures. The government should also proceed with its restructuring plan for the Hellenic Railways Organisation--one of the most important loss-making public enterprises, with an operating loss of around 0.2% of GDP in 2007 and 2008. The authorities' approval in May 2009 of a reform package rationalising this company is hence welcome. A pricing mechanism that reflects operating costs (rather than short-term macro-economic, or political, considerations) is vital for enhancing the financial performance of public enterprises. So is managerial independence, so that these enterprises are able to carry out operational and investment decisions independently of governance interference (OECD, 2007a). In the case of the Hellenic Railways Organisation, the pricing of tickets, routing and major personnel decisions are subject to the approval of the Ministers of Transport and Finance. In the energy field, the majority state-owned incumbent--the Public Power Corporation--is required to apply the same tariffs to the inhabitants of island communities as to the rest of Greece, despite a sizeable cost differential. This is seen by the government as necessary for reasons of social equity because of the very high average generation costs of the power plants in the islands, especially in the smaller ones. Prices should reflect cost developments, however, which would also be good for environmental considerations. In 2009, the government froze electricity tariffs in an attempt to offset the impact of the international crisis, imposing a cost on the Public Power Corporation.

As far as public entities are concerned, current policy initiatives aim at a better control of their spending and recurrent expenditure overruns. Subsidies to cover the deficits of social security funds amounted around 3.2% of GDP in 2007. Public entities, such as hospitals, accumulate arrears to suppliers that are eventually assumed by the government, as was the case in 2005 (around 1.3% of GDP over the period 2001 to 2004) and, more recently, in 2008 (1.6% of GDP since 2005) (Chapter 3). Legislation was enacted in 2008 to contain expenditure and enhance the transparency of fiscal management of general government entities (hospitals, social security funds and local authorities), as part of the ongoing global budgetary reform (see below). The latest SGP advocates the strict enforcement of the recent law, including through the introduction of penalties, such as a discontinuation of funding and the imposition of fines, for non-compliant entities. Imposing hard budget constraints on public entities would help to increase accountability of management and fiscal sustainability. The government should proceed without delay with the consolidation of entities and organisations in the public sector, announced in the SGP, to reduce administrative costs and enhance efficiency in spending (Ministry of Economy and Finance, 2009). The recent merging of social security funds and the announcement of merging or abolishing 255 organisations in the public sector are positive initiatives in this regard.

Improving fiscal management

One of the main priorities in the government's agenda is the alignment of fiscal management with international practices through a reform in the budgetary process and the modernisation of the accounting system for the central government. According to the OECD Review of Budgeting, the Greek budget process lacks strong top-down procedures, is fragmented, and has a detailed input orientation, contrary to best practices (Hawkesworth et al., 2008). Line ministries enjoy a high degree of freedom to propose spending needs (apart from salaries which are centrally controlled) with little early central guidance. No ministerial spending ceilings are set at any stage of the budget process (except for the calculation of personnel expenditure), which limits the incentives for expenditure re-allocation and prioritisation and sometimes leads to the submission of unrealistic budget proposals. Recent analysis by the European Commission has found that Greece has the weakest budgetary procedures among the 18 countries examined, while ranking among the two lowest countries in terms of overall quality index (European Commission, 2007). (9)

Fragmentation makes the budgetary process insufficiently inclusive and opaque. The split between "ordinary" and "investment" budgets, and the separation of their responsibility within the Ministry of Economy and Finance, inhibits an efficient trade-off between the different types of expenditure (Hawkesworth et al., 2008). There is also scope to make the budget more comprehensive. Almost a third of the general government resources and expenditure at present are not a part of the budgetary process (European Commission, 2009a). The Greek budget is comprised only of central government entities, while it excludes broader public entities (public enterprises, social security funds and hospitals, local authorities and other public law entities). What is shown for these entities is only the amount transferred from the central government rather than their finances in order to derive general government accounts presented in a consolidated form.

The detailed input orientation is another shortcoming of the Greek budget. The present system makes it difficult to have an overview and analyse the budget and to derive any output and performance information. The programme budgeting system, currently under development, should reduce the number of lines and strengthen budgetary transparency. The new framework will apply a unique and consistent classification to the ordinary budget, public investment programme and special funds. It will also classify expenditure by functions, programmes and actions on the basis of measurable outcomes with performance indicators (European Commission, 2009a; Ministry of Economy and Finance, 2008b).

As pointed out by the European Commission, the Greek budget also suffers from a "reliability" problem due to the absence of effective mechanisms to ensure budgetary discipline (European Commission, 2009a). There is no systematic assessment of the budgetary implications of new tax or social policies during the preparation stage, nor rules on how to compensate for a deviation of spending and/or revenues from the budgeted targets or binding expenditure ceilings. Moreover, control procedures need to be more efficient as staff resources at all levels are used to processing transactions rather than analysing budget policy or performance (Hawkesworth et al., 2008).

The reform of the budgetary process is welcome and needs to continue

Efforts underway to reform the budgetary process focus on the gradual implementation of programme budgeting, with a full transition to the new system scheduled for 2012. The main objective has so far been to improve the budget structure in support of policy evaluation through the development of a national plan of programmes for all ministries. Pilots of programme budgeting are presented in parallel with the current system, which remains the official budget.

As a positive step in the budgetary reform process, a new package of measures was introduced in August 2008. This abolished the majority of special accounts, incorporating their balances in the state budget. It further established an inter-ministerial committee responsible for the management and control of expenditure by public entities (hospitals, social security funds and local authorities) not included in the state budget. Besides, the new package requires public entities to submit budgets and financial statements according to international accounting standards and to prepare three-year business plans with specific quantitative targets. Considerable progress has been made in this regard, and a significant number of entities are already in compliance. Some steps were also taken towards reforming the accounting system used by the central government in the context of a broader plan aiming to establish modern accounting principles and develop a revised set of accounts (Ministry of Economy and Finance, 2009).

Although still at an initial stage, these initiatives promise to improve the transparency and accountability of public finances, when fully and rigorously implemented. The OECD Review of Budgeting places as "first priority" the introduction of a programme budget with a focus on policy objectives--a practice that has become the norm in most OECD countries, at least at the central government level. Empirical evidence suggests that more transparent government is associated with lower borrowing costs through lower risk premia (Bernoth and Wolff, 2006). The government should also proceed with no delay with its plan to adopt a more top-down approach in the budget preparation phase. International experience provides evidence for the effectiveness of such an approach in containing costs and increasing accountability of fiscal decisions (Hawkesworth et al., 2008). Budget planning and control of expenditure would further be improved by the introduction of a structural surplus budget rule, combined with a public spending rule (Chapter 1), and the move by 2012 towards a multi-year budgetary framework, as envisaged by the government. A more modern and comprehensive accounting system would also contribute to the effective management of public expenditure. Additional gains would be achieved, as discussed in the previous Survey, by concentrating debt management in a single agency. Under current arrangements, around 90% of public debt is managed by the Public Debt Management Agency, with the remaining share (comprising debt issuance for defense procurement and borrowing from non-commercial enterprises, among other activities) being the responsibility of the General Accounting Office.

The projected surge in pension spending threatens the stability of public finances

The pension system will come under heavy pressure as the population ages. The long-term outlook for spending on pensions is worrisome, as confirmed by projections carried out recently by the International Labour Organisation (ILO, 2008a, 2008b and 2008c). If legislation does not change, spending by the country's four largest pension funds, which together account for over three-quarters of the system's aggregate outlays (9% of GDP in 2005), could rise by 10 percentage points of GDP by 2055 (Figure 2.7, upper panel). These projections, based on detailed actuarial evaluations, fund by fund (10), take a different approach from the one used by the European Commission in earlier studies (European Commission, 2006). Nevertheless, extended to all pension funds, these results, which are used as the basis of the recent update of EC long-term pension projections for Greece, are similar to those of the previous EC analyses: total public pension payments are expected to increase from 11.5% of GDP in 2005 to 24% of GDP in 2050 (European Commission, 2009b). This stems not only from the projected rise in the proportion of the elderly in the population, but also because workers will be retiring relatively early in relation to increased life expectancy. Reforms are therefore imperative to avert a destabilisation of public finances.


When compared with the other European countries, whose pension expenditures are expected to rise by an average of 3% of GDP by 2050, these long-term projections highlight how far Greece is lagging behind in reforming its pension system (Figure 2.7, lower panel). (11) Many issues, highlighted by extensive research over at least a decade (Mylonas and De la Maisonneuve, 1999; Borsch-Supan and Tinios, 2001), must be tackled to strengthen the pension system with defined benefits:

* The system is extremely complex and fragmented because of the existence of many pension funds and overlapping rules, which diminish transparency, complicate management and swell administrative costs. There is little control and fraud is difficult to detect, with contribution evasion estimated at between 20% and 30% of the revenue collected (Tatsos, 2001). As is the case with tax evasion, contribution evasion is larger among the self-employed than wage earners.

* There are numerous and powerful financial incentives to stop working before the statutory retirement age of 65, which is one explanation for the low employment rate of seniors, in particular of women (Figure 2.8).

* Pensions, though subject to taxation, are based on parameters that are generous from an actuarial standpoint. The rate at which workers accumulate pension entitlements per year of contributions is very high (Table 2.2). The replacement rate of 70% to 80% of wages (plus any benefits from supplementary schemes) is high, and entitlement to a full pension requires only 35 years of contributions, compared to 40 in many other countries. The replacement rate is computed with respect to average pay over the last five years of work, rather than aggregate career income, which is the reference for many other systems. These tend to be high-earning years and, in any case, this system discourages older workers from staying in the labour force if they get a lower salary.


A pension reform was adopted recently

In March 2008, the authorities adopted a reform with four main components (Box 2.2). The first involved organisational and administrative measures, with a consolidation of pension funds, the number of which was scaled back from 133 to 13, and the introduction of an individual social security number for each citizen as from 1 June 2009. Thanks to these mergers, the contribution rates and pension entitlements of the funds' future beneficiaries will be harmonised. For those recently joining a new fund, such as IKA, there are plans to align parameters gradually to those of the new fund. (12) But the existence of variable provisions for the insured, even within one and the same pension fund, has not been challenged. The more generous rules, e.g. in terms of replacement rates, applicable to persons who entered the job market prior to 1993, as opposed to those starting to work at a later date, have been preserved, as have the benefits of insured workers with dependants and those whose occupations are deemed physically strenuous. The second component of the reform seeks to enhance the pension system's financial viability through a series of changes aiming at improving incentives for workers to stay longer in the labour market and reducing early retirements. The third reform component involves the establishment of an intergenerational solidarity fund (AKAGE), which will start accumulating resources in 2009 to help disburse pension payments after 2019. Lastly, to offset the stricter pension eligibility conditions for women with children, the .fourth component of the reform calls for improving the rules governing maternity leave so as to encourage more women to enter the job market.
Box 2.2. The 2008 pension reform

As mentioned in the main text, the 2008 pension reforms included
four main components. The first component of the reform concerned
the merger of the multiple pension funds (133). Five basic funds
were set up, (1) and the plethora of other schemes, many of which
had been based on agreements with particular companies and covered
small groups of workers, were consolidated under six supplementary
schemes and two welfare schemes.

The second component of the reform sought to enhance the pension
system's financial viability thanks to a series of changes that
will be gradually introduced from 2013 until 2015. They include:

* Increases to the minimum age at which certain beneficiaries can
retire on a full pension. Persons who started working after 1993
and accumulate over 37 years of contributions, who had been able to
retire with no age restriction, will now have to wait until they
are at least 58. For those who had started working prior to 1993
and contributed for at least 35 years, the minimum age has been
raised by two years--to 57 for those exercising a physically
strenuous occupation and to 60 for a11 others. The conditions for
entitlement to a full pension for women with three dependent
children after 20 years of contributions were also tightened, and
retirement options following layoffs and corporate redundancy
packages were abolished for funds merged into IKA.

* The age threshold for early retirement with an actuarial
reduction was raised. Persons having started to work after 1993
with at least 35 years' contributions will have to wait until their
60th, rather than 55th, birthday to take early retirement.
Likewise, women with dependent children and workers in physically
strenuous occupations will have to wait until age 55 to claim early
retirement benefits. In addition, actuarial reductions for early
retirement were raised from 4.5% to 6%. In addition, the
accumulation rate for persons extending their professional activity
by three years, to age 68, was increased marginally from 3.0% to
3.3% per additional year of work after the 35th until age 68,
instead of the 2% for each of the previous 35 years.

* The replacement rates of supplementary pension schemes in excess
of 20% will be reduced gradually to that ceiling. This provision
does not apply, however, if a retirement fund can demonstrate its
long-term financial viability.

The third reform component created an intergenerational solidarity
fund that will start accumulating resources in 2009 to help
disburse pension payments after 2019. The fund, to be endowed with
10% of the proceeds from privatisations, 4% of annual VAT revenues
and 10% of the yearly intake of the special social security fund,
will be administered by a committee made up of representatives from
the Ministries of Finance and Employment. The amount of resources
this fund could build up by 2019 is difficult to estimate
precisely. Under the assumption that VAT revenues and proceeds from
privatisations and the special social security fund remain at their
average level between 2004 and 2008, the fund's endowment could
reach roughly 7% of GDP by 2019, or the equivalent of seven months
of pension payments. (2)

The fourth component of the reform called for improving the rules
governing maternity leave to encourage more women to enter the job
market. These measures, which took effect in March 2008, include:

* A 50% reduction in social security contributions, during a
one-year period, for mothers who return to work after giving birth
to a child.

* An additional six months of maternity leave, paid at the minimum
wage, in addition to the normal entitlement (of 119 days), for
persons insured at IKA. This leave, funded by the Greek Public
Employment Service (OAED), is included in creditable years of

* For each child born after 2000, mothers will also be credited
with fictitious years of contributions to augment their pension
entitlements. These fictitious years (one year for a first child
and two years for each subsequent child, up to a maximum of five
years) will not, however, count towards the minimum contribution
period (15 years), nor towards early retirement.

(1.) These funds are: IKA-ETAM for private-sector wage-earners, which
absorbed the funds for banks and public enterprises; OAEE for the
self-employed; OGA for agricultural workers; ETAA for certain
professions (doctors, engineers, jurists); and ETAP-MNE for

(2.) The estimates are based on the assumption that until 2019 there
will be an unchanged annual influx of revenue from VAT, equivalent
to 7.7% of GDP, privatisations (0.8% of GDP) and the social
security fund (1.2% of GDP).On this basis, around 1/2 of GDP is
supposed to put in the AKAGE fund every year. In addition it was
assumed that the social solidarity fund would earn average returns
of 4.4% per year, equivalent to the average long-term interest rate
since 2002.

The reform heads in the right direction, but must be pushed further

The administrative reorganisation is a vital step towards reducing the extreme fragmentation of the system. Fragmentation has considerably limited the authorities' scope for supervision and reform because of the difficulty of intervening in multiple schemes and particular situations. The reform will also help lower management costs, perhaps by some 0.6% of GDP. The creation of a national social security register, in which each insured person has a unique identification number, will also make for a more accurate count of the number of workers and pensioners and better management of social security services. The new system will also facilitate data collection and information exchange, which should lead to smoother co-ordination between pension fund administrators, the labour inspectorate (SEPE) and tax authorities, which is crucial for effective action against the evasion of taxes and social security contributions.

Administrative reform must continue, however. The apparent simplicity of the pension system's new structure in fact masks a singularly complex make-up within each of the new funds. The basic schemes include a multitude of constituent funds, which have preserved their independence. According to the National Actuarial Authority, within IKA there are some 600 distinct tables specifying pension entitlements for the insured, which are subject to different contribution rates. Full integration must be pursued. In addition, the accounting rules used by the funds need to be unified to ensure better financial control. A centralised and coherent framework for all funds would facilitate introduction of computerised management.

The measures adopted to keep the elderly in the labour market longer also go in the right direction. For instance, the reform has reduced the disincentive to keep working summarised by the "implicit tax on continued activity" at age 60 or 65 (Figure 2.9). Nevertheless, the financial penalty caused by the loss of pension income for persons postponing their retirement is still one of the highest in the OECD. The age threshold of 58 for entitlement to a full pension after 37 years' contributions is low relative to the statutory retirement age of 65, and imposes no early retirement penalty for a person who starts work at age 20 or 21. The same holds true for the minimum age of 50 to 55 for full pension entitlement for women with at least three dependent children and 20 years of contributions. On the other hand, lower contributions that are aimed at encouraging women to work after giving birth are welcome. Even so, the six-month extension of paid maternity leave may lessen their attachment to the labour market by depreciating their human capital (OECD, 2007c). Indeed, this measure extends maternity leave to a total of over 40 weeks, which far exceeds the 8 to 25 weeks granted by most of the OECD countries. The budgetary cost of this measure should be limited, however, according to the authorities since it will be mostly relevant for the low income earners of the private sector. Almost one year after the adoption of this measure, 18 000 women had benefited from it for a total cost of EUR 70 million (0.03% of GDP).

The steeper actuarial reduction applied to early retirement pensions, which may be drawn from age 60 after 35 years' contributions, should also encourage seniors to remain in work. However, a substantial share of the persons theoretically affected by this measure will escape it, insofar as they are workers on minimum pensions to which actuarial reductions do not apply. Half of the pensions disbursed by IKA and OAEE, which together cover 60% of a11 pensioners, are minimum pensions.


In addition, scant progress has been made on the planned revision of the list of physically strenuous occupations conferring entitlement to retirement or early retirement on preferential terms. As a result of the recent reform, such persons may now take early retirement at the later age of 55 (instead of 60 for other workers) after 3B years' contributions, at least 25 of which worked in a hazardous or physically strenuous occupation, and they can draw a full pension at the later age of 57, instead of 65. In 2006, 37% of the new retirement pensions granted by IKA were for persons who had been engaged in strenuous or hazardous work (OECD, 2007a). The committee that was directed to re-examine the 637 occupations enjoying these privileges has proposed excluding roughly half of them and suggested taking account of the degree of strenuousness of the occupations, for which it has established a ranking. However, the implementation of the proposal can take time as it requires legal changes, and a new committee is to convene to review the request of new occupations wishing to be put on the list. According to the OECD, in general there is a weak case for either maintaining or introducing special pension schemes for workers in arduous jobs. Work-related health risks can be better dealt with some well targeted conventional social policies (OECD, 2009). In any event, under current plans the revision of the list of arduous jobs should be finalised by October 2009. It will, however, apply only to new entrants to the labour market and will therefore have no impact until 2040-50.

Further adjustments are vital to ensure the system's financial viability

There has been no quantitative analysis of the recent reform on the long-term financial outlook of the system as a whole. However, according to the National Actuarial Society, the measures adopted should trim the deficit of the main pension fund, IKA, by only around 10% after 20 to 25 years (National Actuarial Society, 2009). Extrapolated to all funds, an impact of that magnitude would limit the rise of aggregate pension expenditure to 10 1/2 per cent of GDP by 2050, instead of 12%. This is not enough to ensure the system's financial viability, and the intergenerational solidarity fund that has just been set up to pre-finance a portion of pensions will not have sufficient funding to play a significant role in this regard. The recent reform did not change the generous pension calculation parameters of the system. Instead, there is only a harmonisation of benefits which will be introduced gradually for members of the merged funds, which currently offer terms more favourable than those of IKA, whose own parameters are already generous by international standards.

Deeper reforms need to be pursued, especially given the risk that rising pension expenditure will limit resources for other sectors, such as health care or education, which play a vital role in the accumulation of human capital and productivity growth. These sectors already suffer from a relative lack of public funding as compared with other countries, in contrast to pensions (Figure 2.10), whereas the effects of population ageing have not yet become perceptible. Pension funds enjoy substantial budget subsidies, equivalent to 3.8% of GDP in 2008, and the size of the subsidy varies sharply from one scheme to another. As in other countries, subsidies are particularly high for funds for agricultural workers, for which they account for 65% of aggregate revenue, implying a great disparity between schemes in the implicit rates of return on members' contributions. It is also important that any changes are made without further delay, as emphasised in the previous Suruey (OECD, 2007a). The upward pressure on pension expenditure can be expected to kick in around 2020-25, and the persons to be affected by reforms need to be given time to adjust. These pressures on public expenditure will be reinforced by the likely increase of health care spending in the coming decades (OECD, 2006).

A reform of pension system parameters is inevitable to ensure long-term financial viability (Box 2.3). There are a number of options to reforming the pension system, including the implementation of notional accounts as in Italy and Sweden (Nektarios, 2007). Whatever the mechanics of the reform adopted, reform will have to involve a set of changes that include a lengthening of the contribution periods to draw full pensions, a drop in the replacement rate and a change in the reference income to compute pensions, to factor in earnings over all or most of a person's career. As in some other OECD countries, pension ages should be linked to gains in life expectancy. A revision of the system for revaluing pensions would also have a significant impact on the system's financial equilibrium. By shifting to price-based indexation from the discretionary approach currently in effect, which according to an ILO model involved a 0.5% real annual revaluation of pensions in its basic scenario, IKA could scale back spending by some 20% by 2050-55, or over 1% of GDP. A price-based indexation, which is currently used by a majority of OECD countries, would, however, entail the risk of driving pensions to a very low level after a few decades for the oldest pensioners and raise an equity problem vis-a-vis the younger pensioners getting higher benefits.


The authorities have to step up efforts to build a consensus behind a reform programme. It is thus also important to dispel the doubts that have been voiced recurrently by the public and social partners over other deficiencies of the pension system, such as the use of pension fund assets to finance health insurance, for which they are responsible as well. A separation between the management of pensions and public health services would, therefore, be desirable to enhance the transparency and effectiveness of resource allocation in both sectors (Chapter 3). Such a change, which is planned by the government, could naturally be part of the ongoing administrative reform that is to align the operations and parameters of the recently merged funds.
Box 2.3. Recommendations for enhancing fiscal viability

Enhancing revenue performance

Given the relatively high tax rates and low collection, efforts
should focus on more effectively fighting evasion and phasing out
remaining exemptions and deductions in taxation:

Broaden the tax base

* Enhance VAT revenue by moving to a more uniform rate structure
and shortening the list of goods and services that are eligible for
reduced rates. A simple VAT structure would also bring Greece
closer to international practice.

* Remove the bias in the taxation in favour of the self-employed by
abolishing the tax-free-threshold (EUR 10 500).

Effectively fight tax evasion

* Continue efforts towards strengthening tax administration.
Improve auditing activities through better qualified personnel,
greater promotion possibilities for auditors, and a more
comprehensive system of exchanging information between auditing
agencies. Grant auditors easier access to taxpayers' bank account

* Consider experimenting with the use of private services in tax
administration, starting with the collection of arrears.

* Ensure a stable and transparent tax system. The practice of
frequent tax amnesties needs to be discontinued to reduce
disincentives for tax compliance. Consider increasing, or even
removing, the legal deadline ("limitation of action by lapse of
time") for revenue collection.

* Further simplify the tax system. The administration of taxes and
social security contributions could be unified and their collection
centralised under a single authority. The large number of earmarked
"third-party taxes" should be phased out to reduce distortions and
improve budgetary transparency.

Achieving better control of primary expenditure Closely monitor
primary spending trends

* Continue efforts towards containing personnel outlays. Proceed
with the planned rationalisation of the special benefits received
by public sector employees. This is indispensible if an adequate
control over the wage bill is to be achieved.

* Speed up the modernization process of public administration. The
new system of human resource management in the public sector should
be implemented without delay. The incentive mechanisms of the
system should be strengthened to increase productivity. Policies of
partial replacement of retirees from the public sector should be
vigorously enforced.

* Continue efforts towards simplifying administrative procedures.

* Ensure that policies are implemented fully and efficiently once a
legislation has been passed. A more focused and transparent impact
assessment analysis is an essential step.

Enhance budgetary control over public enterprises and entities

* Proceed faster with the implementation of the new framework for
the operation of public enterprises. A pricing mechanism that
reflects the operating costs of public enterprises and managerial
independence are vital for enhancing their financial performance.

* Continue steps towards privatising and restructuring state-owned

* Implement forcefully recent legislation to contain expenditure
and enhance the transparency of fiscal management of public
entities (hospitals, social security funds and local authorities)
as envisaged by the latest Stability and Growth Programme. Proceed
without delay with the planned consolidation of entities and
organisations in the public sector.

Improve fiscal management

* Improve the process of budget preparation, monitoring and
evaluation. Move swiftly toward a programme-based budget and a
multi-year budgetary framework, meeting the announced 2012

* Proceed rapidly with the implementation of reforms for the
modernisation of the public accounting system. Fiscal transparency
and accountability would be enhanced by concentrating debt
management into a single agency.

Pension reform

Pursue administrative reform of the pension system

* Separate the administration of pension funds from that of health
insurance funds, as planned by the government.

* Continue administrative reform to align the operations and
parameters of the recently merged funds; unify the funds'
accounting rules and computerise the system.

Continue reforms that encourage seniors to stay in the labour

* Change the conditions for awarding minimum pensions so that
access is limited to persons who have reached the statutory
retirement age.

* Proceed with the planned revision of the list of "strenuous"
occupations and extend the application of that reform to workers
still well below retirement age.

* Raise the minimum age for drawing a full pension after 37 years'
contributions to above 58 (alternatively, increase the number of
years of contributions required; see below).

* Separate family-policy provisions from pension-related measures
and raise the minimum age at which women with dependent children
can draw a retirement or early retirement pension. Assess the
impact of the recent extension of maternity leave and adjust the
measure if it has an adverse effect on the employment of women.

Reform the parameters of the pension system, including a
combination of the following elements

* Lengthen the contribution periods required for full pensions.

* Increase periodically the normal age of retirement in line with
increases in life expectancy.

* Reduce the statutory replacement rate used for computing pensions
and change the reference income so that it encompasses earnings
over all or most of a person's career, and not just the last five

* Consider revising the system for revaluing pensions.

The large proportion of minimum pensions that the system generates is hardly satisfactory, because of the low absolute level of those benefits. However, despite their low level, these minimum pensions are relatively "generous" in relation to the contributions paid by their beneficiaries. This creates a perverse incentive for certain insured workers, who contributed enough to qualify for a minimum pension but have little interest to prolong their activity, to retire early without suffering an actuarial reduction. Conditions for the entitlement to a minimum pension ought to be revised so that access is restricted to persons who have reached the statutory retirement age. This would better focus the benefit on its initial objective, which is to shield older people from the risk of poverty, and, at the same time, lessen incentives for early retirement. On the other hand, it is also necessary to bridge the system's serious administrative gaps which make it easy to evade contributions. It is in fact easy for employers to make contributions based on the minimum wage, even if the compensation actually paid is higher. The lack of co-ordination between the tax and social security authorities make audits difficult, especially since many funds have not yet been computerised.

It is also necessary to pursue further reforms that encourage older workers to stay in the labour market. Inter alia, this would entail accelerating the process of trimming the list of "strenuous" occupations conferring entitlement to early retirement on preferential terms, something that the government plans to do soon, but it would also mean applying the reform not only to new entrants to the job market, but also to young workers for whom retirement is still a long way off. In the same spirit, the minimum age for drawing a full pension after 37 years' contributions should be raised, as should the age 55 threshold for women with dependent children. The current provisions in favour of mothers are a matter for family policy and should not interfere with the pension system. The impact of the recent extension of maternity leave also warrants assessment and, if need be, an adjustment to the measure, if it proves detrimental to the employment of women, as it lures them out of the labour market.


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(1.) For a review of existing studies, see Flevotomou and Matsaganis, 2007.

(2.) See Schneider (2007) for a discussion of methods to estimate the size of the shadow economy.

(3.) In the literature, there are different aspects of the notion of tax avoidance, tax evasion and tax fraud. In this chapter, tax avoidance refers to legal behaviour and tax evasion (tax fraud) to illegal one.

(4.) An unusual feature of EPL in Greece is that it is much stricter for white collar than blue collar workers. Moreover, Greece imposes stricter rules on temporary than regular workers (OECD, 2007a).

(5.) Tatsos (2001) concludes that tax evasion may have reached nearly 15% of GDP in 1997, equivalent to nearly two-thirds of that year's budgeted tax revenue.

(6.) There are three main rates of VAT: the standard rate of 19% for most goods and services, and the reduced rates of 9% and 4.5%. The other three rates are applied only to frontier islands. The VAT system is fully harmonised with EU standards, as provide by the 6th Council Directive of 1977.

(7.) There are no employment nor wage data available for Greece. Estimations are based on National Account data on wage bill. To make the distinction between wages and employment, data were used from the Bank of Greece on the average gross earnings in central government, which however is only a proxy for the wage rates in general government. As such, estimates should be treated with caution.

(8.) In recent years, announced salary increases for civil servants have been relatively moderate (around 3% on average over the period 2006-08) and usually smaller than private sector contractual wage increases (around 6%, on average, over the above period). Budgeted and ex-post increases in the wage bill however have been much bigger because of the cost of special benefits or special pay scales for particular categories.

(9.) The indices are based on information provided in the OECD/World Bank Database, covering all three stages of budget process, namely planning, legislation and implementation. The overall index of budget procedures includes the following dimensions: budget transparency, multiannual planning horizon, prudent economic assumptions and reserves, performance budgeting, centralisation of the budget process, top-down budgeting techniques, and numerical fiscal rules. The quality-index on the other hand includes only the four first dimensions (European Commission, 2007 and 2009a).

(10.) These projections were made on the basis of the legislation in effect in 2005. In the case of the largest pension fund, IKA, which covers private-sector wage-earners, and that of OAEE, for the self-employed, spending could even almost triple as a percentage of GDP between 2005 and 2055. The projected decreases in outlays by the pension fund for agricultural workers (OGA) reflect the reduction in the number of people working in the sector. According to the ILO, this scenario might even be slightly optimistic insofar as it is based on mortality rate assumptions derived from those used by the Commission, which are a bit high. Using the lower mortality rate preferred by the ILO would increase IKA pension expenditure by 0.8% of GDP as compared with the base scenario.

(11.) The projections made for the European countries, including Greece, are based on uniform demographic and economic assumptions formulated by the European Commission. For Greece, these projections, which are based on those of the ILO, were approved by the European Commission's Working Group on Ageing Populations (AWG).

(12.) As from 2013, the contribution rates of funds incorporated into IKA will be brought gradually in line with IKA rates (6.67% for employees and 13.33% for employers). Calculations for pensions in respect of work performed between 31 December 1982 and 31 December 2007 will also be adjusted on the basis of an 80% replacement rate.
Table 2.1. Efficiency of tax collection
2006 in percentage

                                  Effective rates

                                      SSC/WSS     Corporate/
                        VAT/CP (1)     S (2)         GDP

                           [1]          [2]          [3]

Austria                   14.18        13.90         2.19
Belgium                   13.84        16.51         3.67
Finland                   16.78        18.39         3.36
France                    12.71        21.38         2.96
Germany                   10.88        13.19         2.10
Greece                     9.93        15.00         2.67
Ireland                   17.04         6.32         3.77
Italy                     10.58        21.13         3.41
Luxembourg                16.84         9.79         4.95
Netherlands               15.29         9.33         3.32
Portugal                  13.56        14.83         2.99
Slovak Republic           10.62        13.87         2.35
Spain                     11.11        18.97         4.20
Unweighted average of     13.34        14.82         3.23
  the above countries

                                   Statutory rates

                           VAT        SSC (3)     Corporate

                           [4]          [5]          [6]

Austria                   20.00        21.60        25.00
Belgium                   21.00        30.50        34.00
Finland                   22.00        24.00        26.00
France                    19.60        42.30        34.40
Germany                   16.00        20.60        38.70
Greece                    19.00        28.10        29.00
Ireland                   21.00        10.80        12.50
Italy                     20.00        32.10        37.30
Luxembourg                15.00        13.50        29.60
Netherlands               19.00        15.00        29.60
Portugal                  21.00        23.80        27.50
Slovak Republic           19.00        26.20        19.00
Spain                     16.00        30.60        35.00
Unweighted average of     19.12        24.55        29.05
  the above countries

                                   Tax efficiency

                           VAT          SSC       Corporate

                         [1]/[4]      [2]/[5]      [3]/[6]

Austria                    0.71         0.64         0.09
Belgium                    0.66         0.54         0.11
Finland                    0.76         0.77         0.13
France                     0.65         0.51         0.09
Germany                    0.68         0.64         0.05
Greece                     0.52         0.53         0.09
Ireland                    0.81         0.59         0.30
Italy                      0.53         0.66         0.09
Luxembourg                 1.12         0.73         0.17
Netherlands                0.80         0.62         0.11
Portugal                   0.65         0.62         0.11
Slovak Republic            0.56         0.53         0.12
Spain                      0.69         0.62         0.12
Unweighted average of      0.70         0.61         0.12
  the above countries

(1.) Ratio of the revenue from value added taxes to private

(2.) Ratio of revenue from employers' social security contributions
to compensation of employees.

(3.) Employers' social security contributions.

Source: Taxation trends in the European Union (2008), OECD (2009)
Tax revenue database and OECD calculations.

Table 2.2. Main parameters of public pension schemes in selected

For employees in the private sector, from 2008 onwards

                    Statutory       Contribution        Reference
                 retirement age    period for full       period
                   (men/women)     pension (years)    for benefits

Greeee                 65                35           Last 5 years
Canada                 65                40           Best 34 years
France                 60                40           Best 25 years
Germany                65          not applicable        Career
Italy                 65/60        not applicable        Career
Japan                  65                40              Career

Portugal               65                40              Career

Spain                  65                35           Best 15 years
United Kingdom         65                44              Career
United States          67                35           Best 35 years

                 Average benefit       pension
                  accrual rate        level (1)

Greeee                2.57              95.1
Canada                0.63              41.6
France                1.75              50.1
Germany               1.00              36.9
Italy                 1.75              67.7
Japan                 0.55              33.5

Portugal            2.00-2.30           55.4

Spain                 2.90              75.6
United Kingdom      Flat-rate           30.0
United States         1.20              40.2

                 Average pension
                   wealth (2)        Indexation
                   (men/women)       of benefits

Greeee              14.2/16.6       discretionary
Canada               6.4/7.4           prices
France              9.0/10.4           prices
Germany              6.7/8.0            wage
Italy               9.9/10.8           prices
Japan                5.5/6.3           prices
                                     prices with
Portugal             8.1/9.5         additional
                                   adjustments (3)
Spain               11.3/13.4          prices
United Kingdom       4.5/5.2           prices
United States        5.7/6.7           prices

(1.) Pension level as a percentage of economy-wide average earnings.

(2.) Pension wealth as a multiple of economy-wide average earnings.

(3.) GDP growth is also taken into account in the indexation of

Source: Pensions at a Glance, OECD, 2007.
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Title Annotation:Chapter 2
Publication:OECD Economic Surveys - Greece
Geographic Code:4EUGR
Date:Jul 1, 2009
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