Greece
Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix reviews fiscal developments in Greece, comparing its revenue and expenditure patterns with a number of comparator country averages, and discusses prospects. The paper focuses on the evolution and tax-determinants of the most widely followed indicator of the health and competitiveness of a banking system, the lending-deposit spread. It also brings to bear a wide variety of indicators and econometric techniques to the problem of understanding the state and prospects of the banking system.

Abstract

This Selected Issues paper and Statistical Appendix reviews fiscal developments in Greece, comparing its revenue and expenditure patterns with a number of comparator country averages, and discusses prospects. The paper focuses on the evolution and tax-determinants of the most widely followed indicator of the health and competitiveness of a banking system, the lending-deposit spread. It also brings to bear a wide variety of indicators and econometric techniques to the problem of understanding the state and prospects of the banking system.

Greece: Basic Data

Sources: Data provided by the authorities; and staff estimates.

Fund presentation (accruals basis); includes capitalized and accrued interest on rescheduled or consolidated debt for 1991-97, which is not included in the official public finance statistics, based on Bank of Greece data. Interest for 1997 excludes 0.6 percent of GDP because of the introduction of two-year zero coupon bonds.

New definition as of 1990, including military debt and short-term liabilities to the Bank of Greece. Break in the series in 1994, when government foreign exchange liabilities to the Bank of Greece, not previously included in central government debt, were replaced by government bonds (an increase in the debt equal to 10 percent of GDP); and in 1993, when liabilities to the central bank were included in the stock of debt (see SM/95/179, 7/25/95).

Data on a national accounts basis.

M3 is defined as the sum of currency, private deposits, bank bonds, and repos; M4 also includes private sector holdings of T-bills and government bonds of maturity of up to one year.

Includes capitalized and accrued interest on consolidation bonds held by commercial banks.

On the basis of national accounts data excluding EU transfers to the Investment Budget, unless otherwise indicated.

Based on Ministry of Finance data on accrual basis.

End-of-period.

I. Introduction and Overview

1. Since 1994, the first year of the Revised Convergence Program, impressive strides have been made toward macroeconomic stabilization and fiscal adjustment. However, with Greece the only EU country that currently satisfies none of the Maastricht convergence criteria, much remains to be done. This background document presents a number of studies designed to probe in more depth issues of fiscal adjustment, the public sector’s creditworthiness as judged by foreign lenders, and the banking system. Each issue will prove important as the country strives to fulfill the criteria necessary to enter into the European Monetary Union.

2. Fiscal adjustment has followed a gradual path, relying to a significant extent on revenue enhancement and eschewing primary expenditure reduction. Conventional wisdom has asserted that Greece is relatively under-taxed in certain revenue categories, with significant segments of the population largely escaping taxation, and important social expenditures lagging behind other EU countries. Chapter II (prepared by M. Lutz) reexamines these assumptions, bringing to bear a cross-sectional data set which includes EU, OECD, and other countries with comparable income per capita. One conclusion is that while revenue as a share of GDP is only slightly higher than that of the average of economies with similar incomes, when compared to the relevant tax bases effective tax rates are higher than in those of comparator economies, and in some cases even higher than the OECD and EU averages. Regarding expenditures, Greece is found to maintain a level of transfer payments (mainly old-age and disability pensions) that are significantly higher than in countries with similar incomes. Expenditures on general government services and defense is also seem to claim large shares of resources while expenditures on health care and education are comparatively low. The paper also discusses current and prospective consolidation efforts in light of recent work analyzing how the composition of fiscal adjustment influences its likelihood of “success.”

3. The public sector, prompted by high domestic interest rates engendered by the high debt-to-GDP ratio, has supplemented its domestic borrowing program with foreign borrowing, often reducing its cost of borrowing by selling instruments denominated in foreign currency while assuming the exchange rate risk. The key Greek-specific element of the cost of these instruments is the foreign currency risk premium that foreign lenders demand. Chapter III (prepared by C. Christofides) presents a data set of these instruments in order to measure the risk premium component of the foreign interest cost and to link it to a set of macroeconomic and policy variables. Estimating benchmark spreads in order to correct for a systematic reduction in the maturity of these instruments, it is found that the Greek risk premium has increased over the period 1990–96, primarily because of the rise in its foreign debt and a concomitant worsening of its credit rating by external rating agencies. Conversely, it is found that the spread is lower than it otherwise would be as a result of the successful implementation of the hard drachma policy. This finding has implications for the post-EMU period, when exchange rates will be irrevocably fixed for those countries meeting the necessary criteria.

4. The banking system has undergone wide-ranging reform since its liberalization in the early 1990s. Nevertheless, significant areas of weakness remain, with state-controlled banking institutions inheriting bad debts while retaining a large market share. Chapters IV-VI examine the status and prospects of the banking system from a number of viewpoints.

5. Chapter IV (prepared by C. Christofides) focuses on the evolution and tax-determinants of the most widely followed indicator of the health and competitiveness of a banking system, the lending-deposit spread. Since the liberalization of the banking system in the early 1990s, and the concomitant rise in domestic interest rates, the spread has been one of the highest in Europe. By controlling for the impact of various tax factors on the lending-deposit spread, it is found that Greece has in fact had a spread closer to that of other high-spread EU economies over most of this period. One conclusion may be that the banking system is relatively highly taxed, a situation that may not be sustainable in the post-EMU regime as competition is expected to intensify.

6. Chapters V and VI (prepared by D. Hardy), bring to bear a wide variety of indicators and econometric techniques to the problem of understanding the state and prospects of the banking system. The evolution of the structure of the banking system is described in some detail. It is found that, although significant problems remain, much progress has already been made. On the negative side, state-controlled banks still enjoy a high market share despite their high operating costs. Some of these banks continue to enjoy beneficial tax treatment, while other aspects of the tax code tend to discourage adequate provisioning for bad loans. Widespread recourse to foreign borrowing, generally intermediated through the banking system, has also raised systemic risks. On the plus side, competition has intensified, the regulatory and supervisory framework largely conforms to international norms, and banks are increasingly subject to market discipline. Medium-size private banks have expanded their market share, and appear to earn high profits. All banks are diversifying their base of operations, entering sectors such as mortgage lending that in the past experienced little competition. A number of state-controlled banks have been cleaning up their portfolios, increasing provisioning as well as own capital both through new issues and through retained earnings. The econometric results suggest that medium-size banks have a profit advantage over both small and large banks: this finding may have implications for the ongoing reorganization of the banking system that is occurring through sales of small state-controlled banks and through mergers.

II. Fiscal Developments and Prospects: An International Perspective1

A. Introduction and Fiscal Developments

7. This paper reviews fiscal developments in Greece, comparing its revenue and expenditure patterns with a number of comparator country averages, and discusses prospects for continued successful consolidation. The paper is organized in five sections. The first provides a brief review of fiscal developments. The second section discusses appropriate international comparators, including EU and OECD partners, as well as economies whose per-capita income levels and economic structures are closer to that of Greece. The third section analyzes revenue shares and their composition while the fourth does the same for expenditure shares. While not intended to be prescriptive, the comparative exercise is useful in pointing out certain features of the fiscal system that bear further examination, and offers suggestions concerning areas in which further fiscal consolidation could focus. In doing so, it is found that while Greek revenues as a share of GDP are only slightly higher than that of the average of economies with similar incomes, when compared to the relevant tax bases its effective tax rates are higher than in these comparator economies, and in some cases even higher than OECD and EU averages. Regarding expenditures, Greece is found to maintain a level of transfer payments (mainly old-age and disability pensions) that are significantly higher than in countries with similar incomes. Expenditures on general government services and defense are also seen to claim large shares of resources, while expenditures on health care and education are comparatively low.

8. The final section discusses the current and prospective consolidation efforts in light of recent work analyzing how the composition of fiscal adjustment influences its likelihood of “success.” This literature suggests that consolidation efforts focusing on reducing expenditures, in particular reducing social transfers and the government wage bill, rather than on increasing revenues are more likely to be successful. These findings are in contrast with adjustment efforts to date, which have focused largely on increasing revenues.

9. Prior to the 1980s, the economy exhibited strong growth and the authorities pursued prudent financial policies.2 As seen in Table 1, the debt-to-GDP ratio was only 23 percent as late as 1980. Between 1980 and 1993, however, financial discipline weakened significantly. Transfer payments rose from 9½ percent of GDP to almost 16 percent of GDP in 1993, as eligibility requirements were liberalized and payments increased in real terms. Government employment also increased, with the wage bill rising from 11½ percent of GDP to over 15 percent of GDP in 1990. Fiscal revenues rose significantly as well, reflecting higher indirect taxes and social insurance contribution rates, as well as more progressive personal income taxes. Nevertheless, the increase was insufficient to contain the deficit, and by 1985 the debt-to-GDP ratio more than doubled to almost 50 percent of GDP, with a further doubling by 1993 to over 110 percent of GDP.

Table 1.

Greece: General Government Accounts, 1960-97

(Percent of GDP)

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Sources: OECD Analytical databank; Greek authorities; and staff calculations.

10. In June 1994 a Convergence Plan was adopted which targeted meeting Maastricht criteria by 1998. The fiscal deficit targets were met during 1994–96, and the general government deficit fell for three straight years. Of the 6¾ percentage points of GDP reduction in the deficit during this period, 3 percentage points were accounted for by increased revenues, and by a 3¾ percentage point of GDP improvement in net capital transfers. In fact, these two sources of fiscal improvement, combined with a fall in interest payments as a share of GDP, allowed for a 1½ percentage point of GDP increase in primary expenditures (mainly for higher social transfers and a further rise in the wage bill).

11. The authorities must engineer a further reduction of almost 4½ percentage points of GDP to meet the Maastricht criteria. However, Greece already has the highest revenue-to-GDP ratio it has ever experienced, and which is budgeted to increase in further in 1997. Expenditure is also near record levels, with debt servicing in excess of 10 percent of GDP. While the debt ratio may have peaked in 1996, and declining real interest rates, accelerating growth and an improved primary balance should introduce a virtuous cycle in debt dynamics, the nation’s demographics are anticipated to change in the coming decade, with Greece facing one of the more rapid agings of population among OECD members, with deleterious fiscal implications.3 Moreover, the EU presently provides current and capital transfers equivalent to about 5 percent of GDP, which are scheduled to fall over the medium term. Therefore, substantial additional measures are needed if consolidation goals are to be achieved on a permanent basis.

B. International Comparators

12. It is useful to compare Greece’s fiscal structure with other economies. This does not imply that its accounts should mirror those displayed by others on average, as differences will naturally arise from, inter alia, variation in geographic, demographic, cultural, and developmental histories and settings. It is important not to downplay the role these factors have in influencing variations in revenue and expenditure patterns.4 Nevertheless, determining areas in which fiscal data are “outliers” in some sense may suggest the need for adjustment.

13. The approach taken in this paper in determining appropriate comparators is rather agnostic. Possible groupings include the EU, of which Greece has been a member since 1981, and the OECD, of which it is a founding member. One issue arising from these comparisons, however, is that Greece has the lowest per-capita income in the EU and among the lowest in the OECD. Numerous studies have shown that fiscal patterns often vary predictably across economies depending upon their levels of per-capita income, the most famous of which is “Wagner’s Law,” which posits that as economies grow, there is a tendency for the scope and scale of government activities to increase.5 Moreover, economies with similar incomes often display other economic similarities, such as the share of activity comprised by agriculture, the self-employed, small nonincorporated business and other difficult-to-tax sectors. This paper extends comparisons to other countries that have similar per-capita incomes and for which comparable data are available.6 Thirty-eight countries in addition to Greece are used, although data are not available for all countries for all comparisons (Figure 1).7

Figure 1.
Figure 1.

Greece: Per-Capita Income at 1995 PPP US$

Citation: IMF Staff Country Reports 1997, 089; 10.5089/9781451816075.002.A001

Source: IMF, World Economic Outlook.

14. Table 2 provides comparative fiscal data for Greece and 33 other countries for whom general government data on a national accounts basis are available. The data are averaged over 1990–95, as available, to abstract from business cycle influences. There are a number of notable differences between Greece and some comparator averages. First, while it has lower current revenues than either its EU or OECD partners on average, its revenue share is slightly higher than in economies with comparable income levels. Second, as for the composition of revenues, Greece relies to a much lower extent on direct taxes (especially personal direct taxes) than in any comparator group, with more reliance on social insurance contributions, and to a lesser extent on indirect taxes, when compared to economies with similar income levels.8 Third, total current expenditures are relatively high in light of its debt servicing burden, but primary current expenditures (excluding debt servicing) are also higher than in other economies with similar incomes. Fourth, this difference in primary current expenditures reflects a large ratio of transfer payments to GDP, which exceeds that for OECD economies on average. Fifth, Greece has net capital receipts rather than transfers, reflecting, inter alia, EU transfers for investment purposes.

Table 2.

Greece: General Government Accounts, 1960-95 Average

(Percent of GDP; unless otherwise specified)

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Sources: OECD Analytical databank; United Nations National Accounts; WEO; and staff calculations.Note: All aggregate figures are weighted by relative GDPs at 1995 PPP US$.

Excluding Luxembourg for data reasons.

Excluding Luxembourg, Mexico, New Zealand and Turkey for data reasons.

Includes the countries listed in footnotes 4-6.

Includes: Colombia, Costa Rica, Czech Republic, Hungary, Korea, Malta, Mauritius, Panama, Poland, Portugal, Slovenia, Spain, Thailand and Uruguay.

Includes: Australia, the Bahamas, Belguim, Finland, Germany, Iceland, Ireland, Israel, Italy, the Netherlands, Sweden and the United Kingdom.

Includes: Austria, Canada, Denmark, France, Japan, Norway and the United States.

In 1995 PPP US$.

15. Figures 25 provide scatter plots of the current revenue, current expenditure, current primary expenditure, and transfer payments shares of GDP. In all four figures it is clear that ratios for the four Central European economies undergoing transformation into market-based economies are much higher than in other economies with similar income levels. Also notable is the low shares registered by the United States. Abstracting from these outliers, there appears to, be a positive correlation between revenue and expenditure shares and PPP per-capita incomes. Therefore, simple regressions were run, with component shares regressed on PPP per-capita incomes.9 The figures include the shares predicted by the regressions, as well as bands reflecting one standard deviation above or below the predicted shares.

Figure 2.
Figure 2.

Greece: General Government Current Revenues, 1990-95

(Period average)

Citation: IMF Staff Country Reports 1997, 089; 10.5089/9781451816075.002.A001

Sources: OECD Analytical Databank; United Nations National Accounts; IMF, World Economic Outlook; and staff calculations.
Figure 3.
Figure 3.

Greece: General Government Current Expenditures, 1990-95

(Period average)

Citation: IMF Staff Country Reports 1997, 089; 10.5089/9781451816075.002.A001

Sources: OECD Analytical Databank; United Nations National Accounts; IMF, World Economic Outlook; and staff calculations
Figure 4.
Figure 4.

Greece: General Government Current Primary Expenditures, 1990-95

(Period average)

Citation: IMF Staff Country Reports 1997, 089; 10.5089/9781451816075.002.A001

Sources: OECD Analytical Databank; United Nations National Accounts; IMF, World Economic Outlook; and staff calculations.
Figure 5.
Figure 5.

Greece: General Government Transfers, 1990-95

(Period average)

Citation: IMF Staff Country Reports 1997, 089; 10.5089/9781451816075.002.A001

Sources: OECD Analytical Databank; United Nations National Accounts; IMF, World Economic Outlook; and staff calculations.

16. According to these results, Greece’s current revenue share is only slightly higher than predicted, but well within one standard deviation. In contrast its current expenditure share is more than one standard deviation higher than its predicted share, consistent with the 12¾ percentage point difference between the share in countries at similar income levels shown in Table 2. However, this is the result of exceptional debt servicing obligations, as its primary expenditure share is not significantly higher than predicted. In contrast, transfer payments, the bulk of which go to households, are significantly higher than predicted.

C. Revenues

17. In the previous section, it was determined that while total current revenues were not significantly different than what was predicted based on Greece’s income level, it relied to a greater degree on social insurance contributions and to a lesser extent on direct taxes. Moreover, it had relied in recent years on revenue increases as the main vehicle for fiscal consolidation. This subsection explores the tax structure in more detail, and examines the scope remaining for further revenue efforts.

18. In determining the effects of taxation on resource allocation and economic efficiency, it is marginal, rather than average, tax rates that are important. Greece’s statutory tax rates are similar to those in other OECD economies, with the exception of social insurance contributions, which, at 43 percent, are among the highest. However, properly taking into account numerous tax deductions, credits and exemptions, and weighting various marginal tax rates by income distributions to obtain effective marginal tax rates has proven to be a daunting task, especially if done in an international comparative context.10 As a result, Mendoza, Razin and Tesar (1993) suggest a methodology for computing effective average tax rates on factor incomes and consumption using national accounts data.11 They constructed these rates for G7 countries, and in comparing their effective average tax rates for the United States with effective marginal tax rates obtained by other authors, they conclude that their rates are within the ranges of marginal tax rate estimates and that they display very similar trends. They also find that their estimated tax rates are generally consistent with some key predictions of equilibrium models. In particular, in the majority of countries, the saving rate was inversely related to the tax rate on capital income, the average number of hours worked was negatively correlated with the sum of labor and consumption taxes, and the rate of unemployment was positively correlated with the labor income tax rate. Finally, the investment rate was also inversely related to the capital income tax rate.12

19. Table 3 contains data on simple averages of aggregate effective average tax rates for 24 countries for which sufficient data are available, as well as for Greece. Greece’s consumption rate is found to be higher than for any of the averages presented, although this masks a good deal of variation among other countries.13 This reflects a higher reliance on both VAT, which was introduced in 1987, and excises than in other EU or OECD countries.14 The reason for the higher revenue yield appears to be that it has a relatively “clean” VAT structure, with no exemptions for privileged sectors (apart from the standard exemption for firms below the threshold sales level, as in all VAT systems). The range of specific sectors to which a lower rate is applied, namely to books, culture, food, medicine and newspapers, also appears to be narrower than in other most other OECD VAT structures. Similar differences appear concerning excises. They accounted on average for 7 percent of GDP and 17.4 percent of total tax revenues during 1990–94 while these figures were 4.9 percent of GDP and 12 percent of total revenues in the EU and 4.6 percent of GDP and 12.5 percent of GDP among OECD economies on average.15

Table 3.

Greece: Effective Average Tax Rates, 1990-95 Average

(In percent; unless otherwise specified)

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Sources: OECD National Accounts (detailed tables); OECD Revenue Statistics; United Nations National Accounts; OECD Analytical database; GFS1996 Yearbook; WEO; and staff calculations.Note: All aggregate figures are weighted by relative GDPs at 1995 PPP US$.

Excluding Ireland and Luxembourg for data reasons.

Excluding the Czech Republic, Iceland, Ireland, Luxembourg, Mexico, New Zealand, Poland and Turkey for data reasons.

Includes the countries listed in footnotes 4–6.

Includes: Colombia, Hungary, Korea, Malta, Mauritius, Portugal, Spam and Thailand.

Includes: Australia, Belgium, Finland, Germany, Italy, the Netherlands, Sweden and the United Kingdom

Includes: Austria, Canada, Denmark, France, Japan, Norway, Switzerland and the United States.

In l995 PPP US$.

20. Although reliance on consumption taxes has risen among OECD member economies in general (while excise yields have remained stable as a share of GDP), they appear to have increased in Greece, at least since 1980.16 Moreover, while taxes on final consumption are generally thought to be less distortionary than taxes on factor incomes, they nevertheless distort the labor/leisure choice, inducing less labor supply. Therefore, there appears to be little scope for additional revenues from further indirect tax rate increases.

21. Greece also has a much higher effective average tax on labor income compared to economies with similar incomes, and even exceeds the OECD average.17 Initially, the latter comparison is quite surprising in light of the low share of direct personal taxes in GDP as shown in Table 2. The apparent inconsistency is resolved, however, by noting the slightly higher share of social insurance contributions and, more importantly, by noting that the share of wage income in GDP is much lower than the average in the OECD, while the shares of household operating surplus and property and entrepreneurial income are correspondingly much larger. This reflects a larger share of self-employed (even excluding the continued relative importance of agriculture), and a smaller share of dependent employment in the labor force relative to most other OECD economies.18

22. As seen in Figure 6, labor income taxes have increased over the past 30 years, and quite sharply since 1990, reaching the EU average in 1994 (the latest year for which data are available). Reforms of the social security system began in 1990, with increased contributions by private-sector employers and employees. In addition, new civil servants were thereafter required to pay employee contributions. A further round of reforms was introduced in 1993, in order to address the rising costs of the increasingly insolvent social expenditure system, with an additional increase in contributions. Despite these increases, contribution evasion continues, which would otherwise result in even higher effective labor tax rates (OECD 1997b). Health and unemployment insurance contributions were also raised in 1993.19 In May 1994 the highest marginal personal income tax rate was raised from 40 to 45 percent. In order to curb tax avoidance, the authorities instituted in 1995 a system of presumptive taxation on income from agriculture, the self-employed and from unincorporated businesses.20 Levies for farmers are determined on the basis of the crop and size of land being cultivated, while for the latter two groups the tax base depends on the national minimum wage, commercial property rents, location, number of years in operation, the type of university degree (for professionals), and the sector.21 The rates of presumptive taxation were increased in both 1996 and 1997, although separate revenue data from this source are not available. Another factor raising the effective labor income tax rate has been the failure to adjust personal income tax brackets for inflation since 1993, while the cumulative increase in consumer prices has been 50 percent through the end of 1996; nor were the brackets adjusted in 1997. Also in 1997, the government limited or closed a large number of tax expenditures, which along with presumptive taxation has helped to reduce the inequitable burden between the salaried and self-employed, but also further increased the labor income tax rate.

Figure 6.
Figure 6.

Greece: Effective Average Tax Rates, 1965-94

(In percent)

Citation: IMF Staff Country Reports 1997, 089; 10.5089/9781451816075.002.A001

Sources: OECD Analytical databank; United Nations National Accounts; IMF, World Economic Outlook; and staff calculations.

23. The discussion above clearly indicates that the average effective tax on labor income has risen significantly since 1994. Zee (1996a) reviews the nexus between unemployment and taxation. Mendoza, Razin, and Tesar (1993) found econometric support that higher taxes on consumption and labor income are associated with lower hours worked, and that higher labor income taxes are associated with higher unemployment.22 While data on hours worked are not available, there has been a clear increase in the unemployment rate since 1990, coinciding with the sharp rise in labor income taxes.23 Undoubtedly other factors have also affected the labor market as well (including rising real wages and an increase in labor shedding in the manufacturing sector in the last few years), and careful econometric work would be necessary to disentangle the various influences.24

24. In contrast to labor taxes, the effective average tax rate on capital is in line with its comparator economy average, while significantly lower than the OECD and EU aggregate rates.25 This reflects the large share of self-employed and those working for small enterprises, as well as poor tax compliance. The presumptive taxation system discussed above was introduced in order to more folly tax households’ operating surplus and property and entrepreneurial incomes. In order to generate further revenues, a number of other capital income tax measures were also adopted in recent years. In May 1994 the standard corporate income tax rate was increased from 35 to 40 percent. At the same time, the 15 percent withholding tax on interest and dividend incomes was extended to repos and dividends from mutual funds, and was further extended in January 1997, albeit at only a 7½ percent rate, to income from government securities. A reduction in tax expenditures through the limitation and closing of exemptions and deductions in 1997 further increased the effective average capital tax rate.

25. In light of these comparisons, there appears to be little room for generating significant additional revenues through further increases in tax rates without adversely affecting efficiency and growth prospects. The marginal personal income tax rate facing the average production worker was, at 5 percent in 1993, admittedly low, but has undoubtedly risen given the subsequent failure to adjust tax brackets for inflation. Moreover, especially in light of high rates for social insurance contributions and the continued disproportionate burden on salaried employees, any further revenue efforts should focus on improving tax compliance and administration, bringing those individuals that are presently subject to presumptive taxation into the general tax system (see OECD (1996e)).

D. Expenditures

26. This subsection examines two components of current expenditures in more detail, government consumption and transfer payments, in order to identify areas in which fiscal consolidation could focus.

27. Government consumption expenditures as a share of GDP are only slightly higher than in Greece’s comparator economies, though lower than in the EU and OECD (Table 2). It is nevertheless interesting to examine the composition of these expenditures across different functional classifications (Table 4). Although care must be taken in forming conclusions due the fact that the for Greece national accounts-based government consumption data are derived from an old methodology, and due to the relatively small number of countries in some averages, two points are worth noting.26

  • The share of consumption expenditures devoted to general public services (i.e., excluding health, education and other specific tasks) is much higher than in comparator averages. Christodoulakis (1994) reports that the share of civil servant employment in total employment rose from under 14 percent in 1980 to almost 20 percent by 1990, and the number of civil servants have increased by a further 7.5 percent by end-1996, compared to a 4.2 percent increase in total employment.

  • The share of consumption expenditures spent on defense, estimated at about 3¾ percent of GDP,27 is much higher than in all comparator averages (Hewitt (1991, 1993) and Happe and Wakeman-Linn (1994)).

  • In contrast, Greece devotes a relatively low share of public resources to education. Education has always been held in high regard, and by standard measures it is a well-educated country.28 However, the share of public resources presently devoted to education, once adjusted for the upward revision in GDP, is lower than in economies with similar income levels, and sharply lower than in the EU and OECD.29 Although it allocates a relatively small share of public resources to education in total, a relatively high proportion of this is devoted to higher education (Patrinos, 1992). The low level of public expenditure is in part offset by large private expenditures, estimated at 2¼ percent of GDP (OECD 1996b). The bulk of these comprise expenditures for supplemental tutorials (frontisterid) required to improve the likelihood of obtaining one of the limited positions at university. A survey conducted by Kostakis (1990) reveals that direct private educational costs averaged 8.1 percent of family income for upper-secondary General Lycea, and averaged 2.1 percent of family incomes for Technical-Vocational Lycea.30

Table 4.

Greece: General Government Final Consumption Expenditures, 1990-94 Average

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Sources: OECD Analytical databank; United Nations National Accounts; and staff calculations.Note: All aggregate figures are weighted by relative GDPs at 1995 PPP US$.

Average of 1990-91 figures.

Includes: Austria, Denmark, Finland, France, Italy and Spain, Sweden; other member states, except Greece, excluded for data reasons.

Includes: EU, plus Australia, Iceland, Japan, New Zealand and Norway; other member states, except Greece, excluded for data reasons.

Includes the countries listed in footnotes 5-7.

Includes: Colombia, Korea, Malta, Mauritius Slovenia and Spain.

Includes: The Bahamas, Finland, Iceland, Italy, New Zealand and Sweden.

Includes: Austria, Denmark, France, Japan and Norway.

Includes housing and community amenities, and recreational, cultural and religious affairs.

Includes other functions.

In 1995 PPP US$.

28. A second point about the pattern of expenditures is the significantly higher share of transfer payments (Table 2 and Figure 5). This reflects in part cultural and geographic differences between Greece and other comparator economies. The social insurance system, like its counterparts in other European nations, has been in existence longer than in most non-European economies. In addition, rising transfer payments have required increasing social insurance contributions, with potential harmful efficiency implications.

29. Over 95 percent of transfer payments are to households, covering a variety of social expenditures. The OECD (1996f) has recently compiled comparable data on public social expenditures among its member countries (Tables 56). A number of important features are apparent.31

  • The share of social expenditures in GDP has risen significantly, by 6.4 percentage points of GDP since 1980. While beginning at a relatively low base, the cumulative growth since 1980 has been exceeded by only two other OECD economies. The sharpest increase occurred in the early 1980s, with a 3.5 percentage point of GDP increase in old-age cash benefits, following liberalization of eligibility requirements and increase in real pension benefits, and with a 1.7 percentage point of GDP increase in disability and survivors’ benefits. More recently, unemployment compensation expenditures have risen significantly, reflecting restructuring efforts by manufacturers. Nevertheless, they remain less than 1 percent of GDP, an amount smaller than in any OECD economy except the United States.

  • With one exception, Greece is the only country to devote more than 50 percent of total social expenditures to old-age cash benefits—only three other OECD economies devote more than 40 percent of total expenditures to this category. This unusual pattern reflects a number of factors: the slightly higher share of the elderly in the population,32 generous eligibility requirements for pension entitlements, strong incentives for early retirement and, in the case of civil servant pensions, no restrictions of continued employment in the private sector, and the fact that the pension system is relatively speaking the most generous in the EU, with some after-tax replacement ratios exceeding 100 percent.33 Moreover, the pension system is fragmented into more than 300 separate funds, with poor administrative control. As a result, the OECD (1997b) reported that there is extensive abuse of the system.

  • The share of social expenditures devoted to disability pensions is significantly higher than EU and OECD averages. This reflects both a effective liberalization of the system in the early 1980s, as well as past systemic abuse.34

  • In contrast to the high share of public expenditures devoted to pensions, the share devoted to health care is among the lowest in the OECD. This result is somewhat surprising given its more elderly population and the well-known positive relationship between increased health care and aging. The reason for this pattern is possibly the result of an increasing share of health services being provided by the private sector.35

Table 5.

Greece: OECD Total Social Expenditures, 1980-93

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Sources: Social Expenditure Statistics of OECD Members Countries (Provisional Version), Table 1.1; and staff calculations.Note: All aggregate figures are weighted by relative GDPs at 1995 PPP US$.

Excludes Greece, and, for lack of data Germany.

Excludes Greece, and, for took of data, Germany, Mexico end Switzerland

Table 6.

Greece: OECD Social Expenditure Shares, 1993 Social Expenditure Shares, 1993

(Share of total)

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Sources: Social Expenditure Statistics of OECD Members Countries (Provisional Version), Table 3; and staff calculations.Note: All aggregate figures are weighted by relative GDPs at 1995 PPP US$.

Data are for 1992.