VAT adjustment is the way forward

 Restructuring of consumption taxation will not affect labor balance and lead to a reduction of imports

By Dimitris Kontogiannis

The Greek government?s hope for a political solution and a staff-level agreement on the program review by the end of May is looking increasingly unlikely. To the extent that a piecemeal approach to an agreement is not accepted by the creditors, negotiations may drag on even longer and a way has to be found to bridge temporary funding gaps in early June and beyond to avoid a default. Tangible results on value-added tax (VAT) reform and a couple of other issues could help provide the ground for lengthier negotiations and some form of temporary funding.

In a recent speech at the Economist 19th Roundtable with the Government of Greece, Prime Minister Alexis Tsipras laid out the requirements for a compromise with lenders. First, the primary budget surplus for 2015 and 2016 should be lower than targeted. Second, there should be no new cuts to pensions and wages or other restrictive measures that will return the economy to the spiral of recession. Third, Athens seeks a restructuring of public debt and finally, an investment program, mainly in infrastructure and new technologies.

It is reminded that the second EU/IMF bailout program targeted a primary surplus of 3 percent of GDP against a growth forecast of 2.9 percent in 2015 and a surplus of 4.5 percent of GDP on an even brighter economic outlook next year. According to government sources, the lenders are willing to lower the primary surplus close to or below 1 percent of GDP this year on worsening economic prospects and set the surplus at around 2 percent in 2016.

However, even meeting a much lower surplus at 0.8-1 percent of GDP this year would require additional...