Greece freezes public pay to contain deficit

Greece’s move to freeze public sector salaries and impose a one-off tax on high-income earners has highlighted fears that the budget deficit may spiral out of control this year.

Yannis Papathanassiou, finance minister, said the measures, announced on Wednesday, would ensure Greece stays on track for a deficit of 3.7 per cent of gross domestic product – slightly above the 3 per cent limit for eurozone member states.

“We’re creating a safety net for the economy and also giving a boost to Greece’s credibility abroad,” Mr Papathanassiou said.

But the one-off measures are unlikely to satisfy the European Commission, which is pressing Greece to take measures to improve competitiveness and adopt medium-term strategy to bring the deficit under control.

“This isn’t enough. The government needs to address structural issues in order to rebuild confidence in Greece,” said Dimitris Daskalopoulos, president of SEV, the industrialists’ federation.

Slowing revenues in the first two months and a sharp rise in the cost of funding a public debt equal to 94 per cent of GDP, the eurozone’s second-highest after Italy, prompted the government to take action.

The high level of public debt has already ruled out a stimulus package for the Greek economy. With spreads on Greek bonds at record levels since January, the finance ministry has struggled to find ways of containing spending.

The salary freeze for workers earning more than €1,700 a month would “offset some of the extra cost of debt financing”, a ministry official said on Thursday.

Adedy, the civil servants’ union said it was planning strike action in response to the “unprecedented” salary freeze.

This year’s budget had provided salary increases averaging 8 per cent for public sector workers, almost three times the projected year-end inflation rate.

Mr Papathanassiou said the one-off tax on Greeks who declared annual incomes above €60,000 in 2007 would raise €250m, equal to about one percentage point of GDP.

Members of parliament would also pay an extra tax this year amounting to 5 per cent of salaries, which would boost a special fund for welfare payments as “a symbolic gesture”, Mr Papathanassiou said.

Critics of the government described the tax measures as a populist move. “It’s likelt to trigger increased tax evasion this year,” said Yannis Stournaras, an economics professor at Athens University.

The government remains optimistic the country can avoid recession in spite of a worsening outlook for the eurozone, with growth still projected at 0.5-1.1 per cent of GDP this year.

Retailing and tourism have been hit by continuing social unrest in Athens following last December’s riots, with hooded youths staging petrol bomb attacks against banks and offices.

Early summer tourist bookings have slumped by around 10 per cent, raising fears that Greece will lose business to Turkey and other cheaper Mediterranean destinations, according to hoteliers and tour operators associations.