The countdown has begun on the economic package of the TIF, with final decisions to be “locked in” at the end of the month, when the Finance Ministry‘s consultation with the Commission on the fiscal space to be allocated for benefits is completed.

At the same time, banking analyses reveal the heavy price of inflation for wage earners and pensioners, composing a “canvas” of the areas the prime minister’s announcements will turn to.

No VAT cuts

The finance ministry is putting wage increases and direct tax cuts as the first priority permanent income support measures. But they reject suggestions for VAT cuts and the reinstatement of pension and public sector bonuses.

On indirect excise and VAT reductions, Athens argues that it has fully met its commitments under EU directives. Beyond that, it is a matter of policy for each state to weigh and decide on the rates, based on the situation and capabilities of its economy. It also points out that, due to the multiple exemptions, the effective rate is already much lower than 24 %. While on the reintroduction of the 13th and 14th salary or pension, he argues that the high cost (more than 3 billion per year) makes the measure prohibitive.

Inflation thwarts plans

On the other hand, on direct tax cuts, a Eurobank study entitled “Inflation and the Tax Burden on Households” sounds the alarm on the phenomenon of “scale slippage” (i.e. the implicit increase in the tax burden that occurs when the inflation”inflates” nominal wages, pushing taxpayers to higher tax rates) and stresses the benefits for citizens of “indexing” the tax scale, i.e. linking it to inflation each year.

However, according to newmoney.gr, the government appears to be finally abandoning the experts’ recommendations for “price indexation” of the tax scale, i.e. its automatic adjustment based on inflation, according to newmoney.gr. The reason is that if inflation persists or even rises (it is hovering at 3.7% and had even reached 9% a few years ago), the fiscal risk of a permanent indexation would threaten the budget and the country’s economic stability.

Instead, the economic staff favours a “brave” – but one-off and not repeated every year – change in the tax scale, giving “breathing space” to middle income up to 50,000 euros a year, with a focus on families with children. While for the impact of the impact of the poverty, he opts for a further increase in the minimum wage and special support measures where and when conditions require it.

Up to 1 billion the “hidden” cost of inflation

But the Eurobank study shows that, due to non indexation of the scale, the effective tax burden on income from wages, pensions and business activity shot up from 9.9% in 2021 to 11.1% in 2023. It estimates that the “sliding scale” cost taxpayers around €800 million in 2023.

However, the study also shows the fiscal cost that indexation would have each year. For this year, the study estimates that a full indexation would reduce 2025 tax revenues by nearly €1 billion, bringing the primary surplus marginally to 2.0% of GDP. A softer, partial “Portugal-style” indexation would limit the loss to €600 million, keeping the surplus at a safe 2.2%.

The middle class in tax “infill”

However, the impact of not indexing the tax scale for citizens varies significantly depending on the source of income:

– it accounts for almost half (47%) of the increase in the proportional tax on earned income and pensions between 2021 and 2023.

– in contrast, the tax increase on business income due to non-invoicing was minimal: the proportional tax as a percentage of taxable income increased by 1.1 percentage point (p.p.) for business income, but only 0.1 p.p. of this was due to non-invoicing.

– the non indexation of the scale hits the middle and upper middle classes of wage earners proportionately harder. More specifically, the average tax on the wage income of those between 40% and 70% in the relevant income distribution would be reduced by 19% to 32% if the scale had been fully indexed and by 11% to 22% if it had been partially indexed as in Portugal.

– For the lower strata, on the contrary, there would be no benefit from indexation, (not even from full instead of partial as in Portugal), since in any case in our country they pay zero tax, while for the highest incomes the benefit would be less than 12%.

Minimum wage: “Satisfactory increases”

On the front of income increases as a buffer against the austerity crisis, another analysis by Alpha Bank on the minimum wage provided by the European framework of increases showed that “satisfactory increases were also seen in southern countries, such as Greece (6.1%), Portugal (6.1%) and Spain (4.4%).”

By way of preface and the study stresses that “an important factor that could boost incomes is the indexation of the tax scale in order to address the increased tax burden due to high inflation in recent years and nominal income growth.”

On the other hand, it says that “household disposable income is expected to strengthen further over the medium term” in other ways such as continued employment growth and lower unemployment, the increase in the minimum wage and the “unfreezing” of the three-year minimum wage in the private sector, which has been implemented since the beginning of last year and is estimated to have a positive effect on average wage adjustments, the reduction of insurance contributions by one percentage point, the abolition of the business tax, the increase in pensions based on the rate of increase in inflation and GDP, the increase in investment, etc.