IMF Evaluation Criticizes Tax Approach In Greek Bailout

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The IMF has published an evaluation of its handling of the first Greek bailout in 2010, in which it admits that it had been "overly reliant on tax increases," and that efforts to check tax evasion and to make the tax burden more equitable had achieved only "limited progress."

The 2010 crisis gave the IMF "exceptional access" to Greece through a Stand-By Arrangement (SBA) program which brought in VAT rate hikes, a new property tax, and higher income taxes, along with efforts to strengthen tax administration and to improve revenue collection. The report explains that tax increases were chosen because they are "quick to take effect" and would face less resistance than spending cuts. However, Greece's deficit was for most part due to increased expenditure in the 2000s, and the IMF now observes that "the large dose of revenue measures in the SBA-supported program can therefore be questioned, particularly since tax changes constituted almost half of the measures targeted for the first two years of the program."

The program also included structural benchmarks, focusing heavily on fiscal reforms in a number of areas. The report explains that an initial emphasis on changing laws and plans had been "relatively easy to achieve," but that the authorities had only a limited capacity to implement changes, in part due to bureaucratic resistance. Citing the OECD, the report notes factors such as the large size of Greece's informal economy, the complexity of the country's tax system, the large numbers of self-employed workers, and institutional weaknesses.

The program consequently increased its focus on operational details, including "organizational structures, audit practices, and dispute procedures that were leaving large tax debts uncollected." The failure to get higher earners to pay their tax meant there was no "demonstrable improvement in the equity of the tax burden," which risked public support for the programme.

The report acknowledges "notable" failures in relation to the program, including a continuing lack of confidence in the market, the loss of 30 percent of the banking system's deposits, and public debt remaining at such a level that restructuring had to be implemented. It concludes that although the policies adopted were "broadly correct," a number of lessons could be learnt in relation to refining lending policies and frameworks, to taking better account of political economy, and to streamlining the Troika process.