Greece cuts public payroll in effort to cut budget deficit

THE GREEK government says it will effectively axe one in 14 annual salaries from the public payroll and raise VAT as part of an ongoing effort to cut its budget deficit by four points in 2010.

Public servants have gone on strike twice this year, complaining that a 10 per cent cut in their benefits already amounted to the loss of one salary. Yesterday those benefits, which can sometimes double nominal salary, were cut by a further two percentage points. Pensions are being frozen.

Greece has pledged to bring its deficit to 8.7 per cent of GDP in 2010 and was under pressure from the European Union in recent days to make good a €4.8 billion shortfall in its initial plan.

Half of the pain is in public-sector cuts, but the other half is in new revenue. This comes in part from higher value added tax, the top bracket of which now rises from 19 to 21 per cent. Inflicting further pain on household budgets will be a 10 cents a litre hike on unleaded fuel, a 65 per cent consumer tax on cigarettes and a further tax hike on alcohol. Even electrical power will suffer a fee of €5 per megawatt hour.

Preparing public opinion for the latest tranche of measures on Tuesday, prime minister Yiorgos Papandreou said: “We are today in a state of war against the worst-case scenario for our country.”

That scenario, by his description, was a cost of borrowing so prohibitively high that the state would be unable to pay salaries and pensions, which represent 52 per cent of its outlay. “Today, when we borrow €5 billion, we pay €750 million more than Germany does in interest,” Mr Papandreou said. “How can we ever compete with the German economy?”

He is facing increasingly stiff opposition at home, however. These measures would deepen the recession, said conservative leader Antonis Samaras, who rejected the salary cut and VAT and fuel tax rises. He accused Mr Papandreou, who came to power in October, of waiting five months to cut the cost of government.

If he had acted sooner, he said, the cuts would have been softer and less painful. The government’s indecisiveness was expensive.

The governing council of the European Central Bank (ECB) and European Commission chief José Manuel Barroso backed the new measures, each of them underlining the importance of public-sector pay cuts.

In a statement last night, the ECB’s policy-making body said it welcomed the “convincing additional and permanent” measures and said it appreciated that Mr Papandreou’s administration planned to implement them very swiftly.

“Importantly, cutting public expenditure and adjusting public sector wages is a key signal both for the long-term fiscal sustainability and for substantially enhancing the price and cost competitiveness of the Greek economy,” the council said.

“This determined fiscal and structural reform programme will benefit Greek citizens by allowing the Greek economy to overcome the present difficulties and bringing the economy back on a sustainable medium-term growth path with increasing employment.”

Mr Barroso, who stressed that Eurogroup president Jean-Claude Juncker shared the commission’s assessment, told reporters in Brussels that the latest move by Athens was important for the overall stability of the euro area.

The Greek government’s programme to correct its fiscal imbalances was now on track, he said.

“The additional measures announced today appropriately include expenditure cuts and, in particular savings in the public wage bill, which are essential for achieving permanent fiscal consolidation effects and restore competitiveness. The announced revenue-increasing measures also contribute to fiscal consolidation.”