13 the tax base, particularly for indirect taxes. Key fiscal measures, particularly nominal cuts in public wages and pensions, increases in indirect taxes, and work time increase should also help improve competitiveness over time. Box 3. 2012 Budget—Key Measures To underpin the consolidation effort, the 2012 budget includes over 6 percent of GDP of tax and expenditure measures compared to a no-policy change scenario. Measures are carefully balanced between expenditure (about two-thirds) and revenue measures, in order to minimize the negative impact of the fiscal consolidation on growth.
Tax policy measures largely aim at broadening the tax base, which would support a more efficient tax system and facilitate tax administration. The VAT tax base levied at the standard rate will be enlarged from 60 to 80 percent of the total base. This will generate savings of about 1.2 percent of GDP. PIT and CIT tax expenditures will also be reduced significantly, leading to revenue gains of about 0.5 percent of GDP.
Expenditure cuts cover both current and capital outlays and a large number of sectors. The largest yielding measure is the 2-year suspension of the 13th and 14th monthly wages and pensions (equivalent to a 12-percent average cut). Other spending cuts are underpinned by a continued reduction in the number of public employees, higher user fees in the health sector, restructuring of State-owned enterprises, including hospitals, and promotion of efficiency gains in education. Some savings in social benefits are to be achieved through reinforcement of the means testing condition and other eligibility rules.
In view of the unavoidable contractionary impact of these measures, the budget also includes, where possible, equity considerations with a view to protecting the most vulnerable. In particular, the wage and pension cuts are to be implemented in a progressive way—only those employees and pensioners who earn above €1,100 per month will be affected by the full 2-month cuts. Increases in PIT and CIT rates are proposed only for higher incomes (highest PIT bracket) and large firms (annual profits over €1.5 million).
B. Structural Fiscal Reform 17. Implementing fiscal consolidation and halting the flow of arrears hinges on public financial management reform, especially to strengthen expenditure controls and fiscal transparency. As envisaged in the program, the 2012 budget is grounded in a more integrated strategy, which explicitly recognizes the contribution of off-budget spending through SOEs and PPPs to current fiscal pressures. A critical reform continues to be the strengthening of the commitment control system, which is being supported by IMF TA. As a key step towards this objective, the authorities will modify the legal framework on public accounting (MEFP ¶6) in order to: (i) prevent commitments to be entered in the system in the absence of available funds; and (ii) disallow the payment of expenditures outside the commitment control system. Reforms to local and regional finance laws (see below) will constrain scope to accumulate arrears at lower levels of government. While budgetary allocations for the health sector are tight to ensure compliance with cost-cutting objectives (MEFP ¶12), the authorities are committed to ensuring adequate allocations to the sector, and