Fiscal adjustment in Greece under the financial rescue programme: the distributional effects on Greek households

Abstract

This article examines the distributional effects of the fiscal adjustment programme in Greece agreed with the European Commission (EC) and the International Monetary Fund (IMF) in 2010. It deals with adjustment measures that are front loaded and directly related to the household welfare: an increase in Value-Added Tax (VAT) and excise rates and a reduction in wages and pensions. Analysing these two effects reveals that the programme decreases the welfare of all households in Greece but that the adverse effects of the adjustment are mitigated in favour of the poor.

Keywords:

• distributional effects
• Greece
• fiscal adjustment
• household welfare

JEL Classification:

• D31
• H31
• O52

Acknowledgements

The author thanks Juan Zalduendo for helpful comments. The views expressed in this article are those of the author and do not necessarily reflect those of the World Bank, its Board of Directors or the countries they represent.

Notes

¹ As discussed in de Carvalho Filho and Chamon (2008), a variable on country-wide household income, y_t , acts as a deflator of the dependent variable. Sugawara and Zalduendo (2010) employed the same strategy to examine the possible impacts of exchange rate devaluation in the Baltic countries on their households.

² The last category includes economically inactive population excluding old-age pensioners. For simplicity, in case that a person reports both income from work and old-age pension but that the amount of the former is less than twice that of the latter, the person is simply considered as a pensioner.

³ This amount is almost the actual increase in unemployment rate from 2009Q1 to 2010Q4.

⁴ See Deaton (1997) for the calculation of the quartic kernel weights. The parameters used are the data points of 100 and the bandwidth of 2.

⁵ There are around 13 000 observations in the longitudinal data set.

⁶ The household head is defined as a person who receives the most income (from any income sources) in a household.

⁷ The revenue data are also obtained from the Eurostat, which employs a different recording system (ESA95). The results are quite similar to the one reported in Table 1.

⁸According to the Ministry of Finance of Greece, a targeted increase in net revenues in 2010 was 6%, though the actual increase was 5.5%.