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Defense Cuts Tradeoff For VAT Slash

Greek PM Antonis Samaras on TV
Greek Prime Minister Antonis Samaras speaking on TV

When Greek Prime Minister Antonis Samaras on July 17 announced that the country’s international lenders had agreed to a cut in the Value Added Tax (VAT) for the food sector and restaurants from 23 to 13 percent, he didn’t mention there would be a price for it: a reported 100 million euros ($130 million) reduction in defense spending.
Instead, he talked up how the government had gotten a tax break for restaurants, tavernas and their like just in time to help the booming tourist season.
“For the first time, not only are we averting something unwelcome, we are implementing some positive changes,” he said in a rare TV appearance ahead of a Parliament vote on whether to fire up to 40,000 workers over the next two years.
Samaras stressed that the reduction, which will start on Aug. 1 will be in place only until the end of the year, but could be be made permanent if it is deemed a success by the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB,) which will be monitoring for tax evasion.
Samaras said restaurateurs and bar owners would have to pass on their savings to their customers and declare their revenues in an industry notorious for not paying the full amount due.
“If we are able to continue meeting our fiscal targets, as we have been doing over the last year, reductions on other burdensome taxes will follow,” pledged the prime minister.
Deputy Prime Minister Evangelos Venizelos, the PASOK Socialist leader who is a partner in the government headed by the New Democracy Conservative leader Samaras, said the deal with the Troika over the VAT cut was a sign that “our partners have begun listening to us.” He also said that the deal had been reached as a result of the government’s “coordinated effort.” He didn’t say he was the one who, as a former finance minister, had agreed to hiking the tax.
But the newspaper Kathimerini said that the government didn’t reveal that the VAT cut was a tradeoff for defense spending cuts even though Samaras earlier said he wouldn’t make further cuts in military wages or pensions. The government instead reportedly agreed to buy fewer weapons.
Samaras said the VAT cut will give a boost to the economy and lead to more customers for restaurants as many people had shied away from eating out because of the big tax hike that was across-the-board for all businesses, but those outside the food sector will still have the higher rate.  It is estimated that some 10,000 businesses in the sector have closed since the VAT rate was increased in June 2011, leading to 30,000 job losses during a period when the country’s Gross Domestic Product (GDP) has shrunk almost 25 percent.
The government believes the lower VAT for restaurants means Greece will be more competitive with other countries for tourists, such as Turkey, which is bringing in visitors at a rate even surpassing Greece’s expectation of 17 million this year. The Troika didn’t believe it but agreed to the reduction in return for the defense cuts and Greece has to provide a monthly report on the effect of the VAT reduction.

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