Greece raises retirement age and fuel taxes a day ahead of nationwide civil service strike

Greece vows pension, wage reform as strike looms

ATHENS, Greece — Greece took further steps Tuesday to calm global markets spooked by its debt crisis, pledging to increase retirement ages, accelerate reforms and reform its ineffective tax system, on the eve of the first nationwide strike against new austerity measures.

Prime Minister George Papandreou told a cabinet meeting that the reforms “must go ahead now … with greater speed.”

“Our primary duty now is to save the economy and reduce the debt, aiming to do so through the fairest possible solutions that will protect — as far as that is possible — the weaker and middle classes,” said Papandreou, who is to meet in Paris with French President Nicolas Sarkozy on Wednesday ahead of a European Union summit the following day.

Under intense pressure from European Union partners and market speculation — which sharply hiked Greece’s borrowing costs — Papandreou’s center left government has committed to a four-year austerity plan meant to tame a massive budget deficit and soaring debt.

“I believe that our European partners, the markets and above all, Greek citizens, are watching the implementation of the program the government has announced,” Finance Minister George Papaconstantinou said during a news conference to present his draft tax bill. “They are waiting to see whether Greece will really do what it must do. And we are proving, with our daily actions, that things that we announced some time ago are becoming reality.”

The budget deficit stands at 12.7 percent of annual economic output in 2009, more than four times the limit allowed by the EU, while the public debt has exceeded 113 percent of annual economic output. Combined with the country’s ever-increasing borrowing costs, this has raised fears of a protracted crisis with contagion to other troubled EU economies such as Portugal and Spain, and pushed down the euro exchange rate.

The new tax bill, Papaconstantinou said, will increase the burden on the rich while easing taxation for those on low incomes. The top income bracket which will be taxed by the maximum 40 percent will be expanded to include incomes of over euro60,000 a year, from the current euro75,000 threshold.

Papaconstantinou said that public consultation over the tax bill continued, and that there could be changes, but that any amendments would be based on the broad principles outlined in the draft.

He confirmed plans to freeze public sector hirings and wages, while cutting bonuses or stipends by 10 percent, a move he said would trim between euro18 and euro345 euros off monthly salaries. The stipend cut will also apply to those of the prime minister, ministers and other high-ranking ministry officials.

“We all know that the civil service salary system is one full of injustices, that lacks any central logic and has evolved with successive bonus payments,” Papaconstantinou said. “We are committed to have a unified payment system.”

He also said all Greeks must collect receipts in order to qualify for the income tax-free amount of euro12,000 — an attempt to crack down on widespread tax evasion, where vendors under-declare their income by not giving receipts. Cash registers will have to be installed everywhere, including kiosks found on practically every Greek street, and food markets.

“We invite all Greeks to contribute to the great effort against the scourge of tax evasion, which is tantamount to theft,” he said.

Greece’s powerful and wealthy Orthodox Church will also be tapped for income, with taxation to be imposed on the church’s assets and the profits it gains from their exploitation, the minister said, adding that the government was currently in a discussion with the church over the issue.

Greek stocks closed up 4.96 percent Tuesday, while the spread between 10-year Greek government bonds and the benchmark German issues of equivalent maturity fell to just under 320 basis points, down 30 points from Monday. The improved climate came ahead of Thursday’s EU summit in Brussels, and after news that European Central Bank President Jean-Claude Trichet had left a banking conference in Australia to attend the summit, stoking speculation the heads of government and state could come up with some kind of solution for Greece.

The government has announced euro2 billion ($2.74 billion) in public spending cuts so far, and hopes to raise more than euro5 billion from extra taxes and fighting endemic tax evasion.

But Papandreou’s Socialists, elected four months ago, have shied at further salary cuts or layoffs in the civil service, which employs some 750,000 people — all guaranteed lifetime jobs.

Labor and Social Security Minister Andreas Loverdos announced a two-year increase in the average retirement age, to bring it to the age of 63 by 2015. Papandreou had said he would increase the retirement age, but not by how much or by when.

“The situation is dramatic, and our response is clear. We are changing the country’s social security system to keep it alive and allow it to have a future,” Loverdos said. “The reforms … will add life to the system and allow it to endure for the coming decades.”

Loverdos said the changes would bring Greece’s average retirement age above the EU average of 61.1 years.

The Finance Ministry also gave details of a previously announced hike in fuel taxes, saying gasoline would now cost 14 euro cents more per liter, while diesel would be six cents more expensive — increases calculated to bring an extra euro934 million into state coffers, the ministry said.

The reforms announced so far have angered powerful labor unions, and civil servants have called a nationwide strike Wednesday.

The walkout will affect state schools, hospitals, tax offices and local government offices, while all Greek airports will be closed to international and domestic flights. Private sector workers will walk off the job on Feb. 24 in a separate strike.

Papandreou called on the unions to show restraint.

“We must all change, or we will all sink together — and we will not let the latter happen,” he said in Parliament late Monday.

Some experts have said Greece could need a bailout — but EU and Greek leaders are resisting the idea, and Athens insists it can weather the storm alone and that its measures will bring its deficit back to below the 3 percent mark by the end of 2012.

Associated Press Business Writer Aoife White in Brussels and AP writers Derek Gatopoulos and Elena Becatoros in Athens contributed to this story.