Greece spent profligately and did not fully commit to austerity, right? Wrong. Australia Institute chief economist Richard Denniss explains five misconceptions about the Greek debt crisis, with help from Australia Institute researcher Cameron Amos.
The fallout of the Greek “oxi” referendum has caused commentators, analysts and politicians to warn of the dangers of accruing a "Greek-style level of debt". Social Services Minister Scott Morrison took to the airwaves to warn that, for all the human tragedy associated with the Greek economic collapse, they “had their warning back in the ‘80s and chose to do nothing about it”, suggesting Greece’s bankrupt pensioners
and 40% of children who are living in poverty
are “reaping what they sowed
Australia’s Coalition government’s economic spokespeople have been beating the deficit hawk drum since day zip. For the government
, the lessons from Greece are clear: we need to cut public spending, cut public debt, cut taxes. Basically, cut government.
But plenty of steps led Greece to where it is today, and plenty of steps could have avoided it. If politicians are really concerned about avoiding a Greek tragedy, they should look at the facts:
1. Greece is, and has long been, a low-tax country.
Greece’s tax-to-GDP ratio is persistently low. In 2009, when the debt crisis began to spiral out of control, Greece’s tax-to-GDP ratio was lower than Germany, France, Italy, Spain, the UK, the Netherlands, and Canada.
Indeed, in the last 50 years, Greece’s tax/GDP ratio has only once been higher than the OECD average.
2. Greece’s corporate tax rate is far lower than Australia’s.
The deficit hawk is not a species unique to Australia. The universal prescription to every economic problem, “cut taxes and restore business competitiveness”, was loudly apparent in the early days of the collapse.
Soon after the global financial crisis, Greece cut its corporate tax rate
from an already low rate of 25% to 20%. The tax cut was justified at the time by Greece’s conservative prime minister, who suggested the cut would provide “a strong incentive for investments and competitiveness
Unfortunately, the cut helped neither the Greek economy nor its budget. Tax revenue plummeted, and the economy contracted by 17%. It did help the foreign shareholders of companies operating in Greece though.
3. Greece is not a big spender on social welfare.
Greece’s irresponsible, fiscal freewheeling image is widely accepted, but the characterisation is a sloppy one. In reality, Greece’s public spending on social welfare has been about average for the OECD for the last 30 years. (Well, a little bit lower than the OECD average, but let’s not split hairs.)
In fact, as a share of GDP, Greece spent less on social welfare than Germany
every year between 1985 and 2010.
Nonetheless, Germany continues to run surpluses, so much so that it’s becoming a problem
. Germany can do that, unlike Greece, because it’s collecting plenty of revenue.