»Die Steuerbelastung in der Krise trifft besonders den ärmeren Teil der griechischen Bevölkerung.«

Objectives of the study

The problems of poverty and inequality constitute a focal point of public social and political debates during the current economic crisis. However, the arguments put forward are often insufficiently founded and are sometimes discredited by the results of empirical studies. The objective of this research is to explore the distributional impact of the adjustment policies implemented in Greece during the crisis period (2008-2013), in particular the extent to which the principle of solidarity has been taken into consideration in policy-making during these years, as well as the equity impact of specific policies.

The determinant factors of inequality and its components will be explored by examining the most important policy tools of adjustment which have been used (direct and indirect taxes, property taxes, income and pension cuts and institutional changes), but also the two most significant effects of the crisis: the collapse of GDP and employment. Based on a decomposition analysis we will examine the contribution of various income sources and the impact of policy decisions on the structure of inequality. The analysis of unemployment (data 2014), the level of labour income of households, as well as the underlying policy measures which had a more specific impact on these variables, will allow us to explore the changes in poverty risks and social exclusion during the period of crisis.

Based on real and detailed data on incomes, taxes and property, broken down by deciles, we will seek to show the driving forces behind the deep re-rankings in the income and property hierarchy of the Greek society and in particular their impact on the bottom, middle and top strata of society.

The issue of solidarity and inequality raises many policy questions, such as:

- In a crisis affecting across-the-board income and employment, under which conditions should solidarity and equality considerations trigger policy intervention?

- Which specific interventions could and should preserve solidarity and equality and for which social groups?

- Does it matter whether inequality is the outcome of market forces or of policy decisions?

- Does increasing inequality exert corrosive effects on other critical social, economic or political variables?

- What are the distributional consequences of fiscal austerity measures? Does the size of fiscal adjustment matter for the policy tools to be used?

- How does the distribution of the burden of adjustment impact the drivers of growth and the path of the economy to an exit from the crisis?

In times of crisis, lack of solidarity is also associated with the emergence of new divides and broader adverse social situations, the impact of which is not reflected in conventional social indices, such as:

• The recession, coupled with tight liquidity and a range of government practices (e.g. delays in the payment of arrears to suppliers of products and/or services or delays in VAT or other

tax refunds to firms and individuals) exerts additional pressure to thousands of employees, because of their second-round effects, e.g. delays in wage and salary payments for many months.

• Questions on solidarity are raised because of the different institutional rules and treatment concerning the employees in the public and the private sector, respectively.

• Tax increases and cuts in public services coupled with austerity have affected negatively a broad range of other aspects, such as equity in education and have led to phenomena of ‘energy poverty’, which cannot be easily quantified by standard inequality indices and statistics.

The analysis will attempt to give insight into some of these issues to the extent that there is sufficient material for a scientific analysis.

After seven years of recession, Greece has achieved substantial progress in fiscal adjustment till the end 2014 and has adopted painful policies with regard to wage and pension cuts, labour relations, layoffs and social policies. However, the country is still in a very fragile and uncertain situation, fiscal adjustment has as yet failed to drive the economy into a growth trajectory, while the fallout of the crisis has spread from the economy to the political level. As will be shown, certain structural aspects of inequality played a critical role as a determinant of the crisis, while the same underlying relations did not change significantly during the crisis.

A more general question concerns the inverse cause-effect relationship between solidarity and policy making. The question is whether weak solidarity has facilitated or impeded the adjustment process and growth, the latter being - besides fiscal adjustment- the second crucial factor of a successful rebalancing policy. Obviously, the question is not easy to answer. Success or failure is associated with a wide variety of economic, social and political factors, while social reactions depend also on the perceptions which are generated by ideologies, political rhetoric, knowledge, established social attitudes and stereotypes, as well as by the social capability to judge and decide between two future, hypothetical, prospects and their hypothetical consequences: one of no change and one involving different types of changes.

Finally, the findings of this analysis and our attempt at a synthetic presentation, seek not only to explain some of the most crucial social effects of the crisis, but also to shed light on the possible nexus between the issues examined and a growth- and socially oriented policy to overcome the present adverse social and political landscape.

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Concluding remarks

The analysis of economic developments and policies over the period of the crisis, as well as the impact on incomes, employment and inequality, showed that new inequalities, divides and balances emerged in Greek society during these years. The findings of this study depict a reality as shaped both by what has been done and by what has not. The answer to the question of what could have been done differently is not easy. Any answer, however, that would convincingly suggest that the impact could have been milder would mean that the policy management of the crisis involved, ultimately, “reverse solidarity”.

Further to the more specific conclusions presented in individual sections, our analysis allows also some central observations to be made:

First, in the 2008-2012 period we can see a surge in inequality regarding certain variables, such as income from wages, while overall inequality exhibits a mixed trend89. Although the limited variations in overall inequality during the crisis is an important fact, what is more important is that it occurred amid growing poverty and total pauperisation of a substantial part of Greek society, mainly in terms of “absolute poverty” but also partly in terms of “relative poverty”. By this downspiralling, the “bottoms” drifted much further apart from the “tops”, even if they had suffered relatively lesser income losses.

Thus, overall inequality revealed limited changes, but specific groups were hit in an extremely unequal degree while society experienced a drastic and violent reduction in incomes and living standards90. The at-risk-of-poverty rate began to increase in 2010; by 2013 it stood three percentage points above its 2009 level, while a significant number of households could no longer afford goods or services that are considered as basic necessities. New social strata fell into new forms of poverty. Shrinking incomes were partly the result of state intervention in wages, pensions and the labour market, but also to a large extent stemmed from the crisis itself. When the crisis starts to subside, those who lost income as a result of government austerity measures will probably be worse off than those who lost as a result of the crisis, with the exception of the unemployed. The automatic mechanisms of the market will work in favour of the latter category, and the degree of inequality will begin to increase, at least in an initial phase of the recovery.

Inequalities due to the crisis were exacerbated by the fact that the tax burden on the weaker groups of the population was much heavier than that of the stronger ones. This was not a solidarity factor. It can be argued that the burden, e.g. on the property of the richest or even the less rich strata, had been unduly nonexistent before the crisis. However, the burden imposed during the crisis on these two groups and the lowest-income groups was strongly asymmetric, occurred in an extremely adverse economic environment and very abruptly, which made the adjustment particularly painful.

Second, during this period a number of new divides emerged in the Greek society, between:

o those who have income and those who have not any, mostly due to their exclusion from the labour market;

o those who fully declare their income for tax purposes and those who, even during the crisis, can hide income;

o those who can use their power to recoup a large part of their income losses and those who have no such chance;

o those who still enjoy preferential tax exemptions or state-facilitated tax avoidance, although some groups among them have remarkably increased their incomes during the crisis, and the remaining taxpayers;

o those who, thanks to political interventions, have only mildly been affected by the crisis and those who continue to struggle, lagging behind;

o among the “haves” of 2008, those who have been pauperized and those who are now better off than before.

The emergence and persistence of such divides implies that certain categories of people have come out as winners from the crisis. The notion of “winners” does not necessarily mean that all of them are better off relative to a benchmark before or at the beginning of the crisis. Rather, it means that some groups have achieved either an improvement of their relative position in the income hierarchy or an upward income development. And of course it makes a lot of difference if this development has been the result of skills, hard work or even ability to exploit opportunities or the result of political decisions.

Third, the tax measures affected many households and individuals among the “bottoms”, but also many belonging to the “tops” which –perhaps partly due to tax evasion– are statistically recorded as “bottoms”. In fact, more groups with lower and medium-to-high incomes were for the first time required to pay tax, for incomes unchanged or lower than before. The resulting discontent stoked a political polarization and even extreme political affiliations.

Fourth, counter-intuitively and in contrast with what is observed in other countries, inequality in real property is not so high. The respective inequality indices are indeed higher than those for income and appear stable or declining over time. This however should be seen in the context of the fact that real property, which had for decades been used also by medium- and low-income groups as a primary tool for channeling savings and as a shelter from political or economic shocks, has become a trap for these same groups, which in the crisis period faced a much heavier property tax burden relative to the wealthier groups.

Fifth, our analysis focused on changes in incomes and the impact on inequality and poverty. However, there are additional relevant factors which could not possibly be discussed here. Perhaps the most important among these factors is household debt, especially the mortgage loans contracted by households when their income levels and prospects were very different before being swept out by the crisis. During the crisis, a significant number of households remained with one or more members unemployed or with lower income as calculated in this study. On top of that, they found themselves with a high debt to banks, which was very difficult or impossible to service with their reduced income. This impact is not feasible to factor in, and even less so to differentiate across income groups, but it appears that it is very significant.

The above findings suggest that inequality does not arise only in respect of wages or total income or income from property or other sources. Apart from these sources, at least the following additional sources of inequality exist:

Inequality in the applicable tax regime.

Inequality in the applicable social security regime, given the existence of contribution exemptions or a disproportionate contributions/earnings relationship for several categories of workers.

Inequality in the evolution of wages/salaries and pensions; inequality is much lower among older cohorts of workers and becomes much higher when more recent cohorts are included. The same applies for pensioners, although to a lesser extent.

Inequalities in access to a number of professions, due to long-established barriers to entry or “artificial privileges”, statutory fees and reserved activities. As a result, production costs increase, leading, in the case of tradables, either to lower competitiveness or to a squeeze on wages in order to offset the higher costs and lower competitiveness resulting from the lack of competition in intermediate products or services.

These findings are different and complex aspects of one and the same reality, which was created during the crisis. Whether seen as a result of the crisis or as factors behind the unfolding of the crisis, they highlight an urgent need for crucial political choices, of which we will mention the following three:

(a) Designing and implementing policies to stimulate growth. This choice is urgently necessary for a number of reasons: first, growth will enable a gradual exit from poverty; second, it will lead to an improvement of macroeconomic aggregates linked to the level of GDP (government deficit and debt ratios, new investments, real incomes); and third, it will allow a return to conditions of higher and better paid employment and more social convergence.

(b) Effectively tackling tax evasion, contribution evasion, preferential tax exemptions or tolerance on the part of the government towards these phenomena, which remain a major factor behind inequality and the crisis in Greece. The preponderance of these phenomena means that inequality in income distribution is generated both in the market and in the personal distribution of income, which includes government intervention. In these conditions, market rationality, where it exists, is not neutral. The inequality-creating functioning of the market itself is generated outside the market, largely as a result of government interference in the market’s rules of operation.

(c) Focus on raising the productivity and efficiency of the State, eliminating political corruption and the costs associated with an invisible corruption tax'91 that these conditions impose on the economy and society.

These three problems were not central to the policies implemented during the crisis. Yet, the relationship between inequality92, growth and efficiency of the government sector is important because growth is key to a successful fiscal consolidation and stabilisation. Fiscal consolidation without growth is doomed to fail, and vice versa. Therefore, the question arises whether and to what extent inequality affects growth and, in so doing, determines the success or failure of policy responses to the crisis.

The growth rate is a function of capital and other inputs (independent variables) that are mobilised at any given time in a productive system (labour, knowledge, technology-innovation, natural resources). According to several analyses, the degree of inequality also enters into the growth function as an independent variable exerting a direct and negative effect on growth. Equally significant is the effect on growth from the level of corruption and the efficiency of the government sector and government policy, along with the choices of the Troika. Furthermore, inequality and the other factors (policy, corruption, efficiency) affect negatively the independent variables in the growth function (labour, investment, innovation, etc.), thus determining not only directly but also indirectly, yet significantly, the growth rate and the overall performance of the country.

Besides its economic aspect, growth is also a political variable in the sense that the “political success” of a government, especially in circumstances of crisis, depends also on the growth this government achieves. However, the term “growth” is not so clear as one would think. It is useful to distinguish between the growth which is potentially feasible, although “feasible” is hard to define, and a notion of growth that is more like wishful thinking, i.e. a construct of the expectations which are formed in a society and also determine the degree of political success.

If, therefore, higher inequality is negatively related to growth (either directly or indirectly, through other variables), the question is to what extent the evolution of inequality can affect growth, thereby also political developments in Greece.

The main conclusion is that the level of inequality in Greece was high before the crisis and remains so, although it declined slightly during the crisis. Before the crisis, the policy tool to address inequality was government borrowing as a means of creating income and financing social expenditure and public investment 93. Borrowing served, and quite well indeed, as a substitute for a policy of redistribution and mitigation of inequalities94. But if this choice accumulates more and more debt and the country enters a crisis, the resulting slump in growth cancels the positive results achieved over a number of years and leads to a violent backtracking. This pattern characterised the path of Greece95 in recent years.

It was also found (Table 6.3), that inequality after taxes compared with pre-tax inequality is limited by 6.0% in 2008 and by 7.1% in 2012. That is, government intervention has mitigated inequality. However, given the profound upheavals that occurred during this period, the fact that the government’s inequality-reducing contribution increased by merely one percentage point between 2008 and 2012 is a very poor performance. It is an indication that the additional tax burden was imposed on the same population of taxpayers, failing to expand the tax base and reduce tax evasion. If amid conditions of drastic reductions in low and higher incomes, the tax burden mainly affects the same population of taxpayers and hardly those people who in one way or another evade, or affects evenly the tops and the bottoms, then it is ultimately regressive and leads to more inequality, with socially painful results. And if, as we saw, low incomes face a significantly heavier tax burden, then the regressive character becomes even more pronounced.

These developments raise the question: Could the intensity of the crisis have been mitigated? Could the government’s or the Troika’s policy limit the depth of the recession and the pauperisation of wider social strata? If the contraction of GDP had been one percentage point smaller, GDP would have been higher by EUR 2 billion, if it had been two percentage points smaller the output gain would have been about EUR 3.5-4 billion, and such differences would have positive social or growth effects.

In the context of this reasoning, it is very important to mention also a further driver of growth: the liquidity of the economy, given that liquidity constraints were one major factor behind the collapse of many firms, production activities, exports and employment. The contraction of GDP and the crisis definitely played an important role. However, a critical role was also played by the government’s insistence on maintaining a high level of public expenditure which had soared in the years before the crisis. Unable to finance public spending with the Troika loans, the government raised significant amounts from banks, squeezing domestic liquidity. This was not a necessary consequence of the crisis. A different adjustment strategy would not have such a strong negative impact on growth, employment and incomes and would have made possible a milder tax burden. Hence, it is the political choices that led to this result and exacerbated the adverse economic and social impacts.

Last but not least, solidarity is directly linked with policy inefficiencies. Inefficient or bad policies may result in reverse solidarity, insofar as inefficiency can be avoided, in particular when the outcome of the desired burden or relief of specific social groups is the result of a choice. We can say that inefficiency refers to a collective outcome, but from a policy perspective inefficiency is evaluated against the objectives pursued by the ineffective policy. Such a choice therefore prevents the effort to increase the productivity of public expenditure. An increase in the productivity of public expenditure, by a rationalization of processes, greater transparency, a reduction of waste or corruption, downsizing of functions that do not serve any real purpose and better use of human and physical resources, would have beneficial effects on macroeconomic aggregates. However, such a policy would be detrimental from a partisan viewpoint. Thus, except for some limited interventions, mainly in the health sector, little use of this tool was made in the period reviewed.

In conclusion, the policies pursued included many inefficiencies. In the years 2009-2014, the primary fiscal deficits accumulated additional debt of EUR 42 billion, the additional loans to Greece were EUR 230 billion, nominal GDP fell by EUR 55 billion (-24.7%), headcount unemployment increased by one million, income from wages was cut by 27.4% and the country’s prospects are still surrounded by high uncertainty. All these changes sum up to an exorbitant bill, suggesting that policymakers (national and European) showed neither solidarity nor effectiveness in crucial crisis management issues.

It could be said that the accumulation of a high external debt by Greece in the pre-crisis period came at a high price. However, borrower responsibility is the flipside of lender responsibility, and in this case neither side behaved responsibly. Moreover, after the crisis broke out, the “lender responsibility principle”, stating that lenders are responsible for their own wrong choices or practices, which has been central to decisions on the Banking Union in 2014, was ignored in 2010-12. Aiming to protect private bank lenders and their countries from the risk of being sanctioned for their business conduct, the euro area countries turned bank loans to Greece into official (public) loans.

Accepting that a crisis management with such a bottom line result was effective and that therefore there was no room for a more positive alternative, would be a very heroic stance. However, an analysis of these issues would be another long chapter beyond the scope of this study.

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