Greek Budget Realities: No Easy Options

16 Pages Posted: 2 Nov 2015

See all articles by Christopher L. House

Christopher L. House

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 2015

Abstract

As of August 2015, Greece’s loan repayments due to external creditors through 2057 summed to €319.5 billion, requiring an average debt payment on a flow basis of 4.1 percent of 2014 Greek GDP. This paper examines the economic impact of increases in distortionary taxes on consumption, capital and labor income as well as reductions in government expenditures sufficient to increase Greece’s primary balance by one percent of 2014 GDP – roughly a quarter of Greece’s total debt obligations. In the baseline case calibrated to the Greek economy, all of the tax and expenditure policies we consider produce declines in output in both the short- and long-run. Projections of the primary surplus based on static revenue scoring grossly overestimate the amount of actual revenue that Greece would raise due to the endogenous adjustment of capital and labor. Meeting the debt repayment schedule is substantially more costly because Greece is a small economy that is integrated with the larger European economy. Failure to incorporate the impact of capital and labor mobility results in a significant overestimate of future revenue. Delaying the implementation of tax increases or government expenditure cuts can help mitigate the short-run fall in output, but such delays require greater economic hardship in the long run.

Suggested Citation

House, Christopher L. and Tesar, Linda L., Greek Budget Realities: No Easy Options (October 2015). NBER Working Paper No. w21688. Available at SSRN: https://ssrn.com/abstract=2684992

Christopher L. House (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-763-2254 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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