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Greek Budget Realities: No Easy Options

Author

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  • Christopher L. House

    (University of Michigan and NBER)

  • Linda L. Tesar

    (University of Michigan and NBER)

Abstract

As of August 2015, GreeceÕs loan repayments due to external creditors through 2057 summed to Û319.5 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 GreeceÕs primary balance by one percent of 2014 GDP Ð roughly a quarter of GreeceÕs 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

  • Christopher L. House & Linda L. Tesar, 2015. "Greek Budget Realities: No Easy Options," Working Papers 652, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:646
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    File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers651-675/r652.pdf
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    References listed on IDEAS

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    Cited by:

    1. Yu-Fu Chen & Michael Funke, 2017. "Greece’s Three-Act Tragedy: A Simple Model of Grexit vs. Staying Afloat inside the Single Currency Area," Open Economies Review, Springer, vol. 28(2), pages 297-318, April.

    More about this item

    Keywords

    Greek debt;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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