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Greece passes landmark austerity budget

The country now waits on its creditors to save it from imminent bankruptcy.

After days of fierce parliamentary debate, Greek lawmakers pushed through the country’s 2013 austerity budget early on Monday; an essential move to unlock the vital bailout funds needed for Greece to avert imminent bankruptcy.

The budget – approved by a 167-128 vote – includes €9.4bn worth of austerity measures, including tax hikes and across-the-board cuts to pensions, public salaries and social benefits. The retirement age will increase by two years to 67.

The net effect on Greek debt will see the annual budget deficit tapering to 5.2 per cent of GDP, down from this year’s figure of 6.6 per cent. The budget follows the news that Greece is currently on target to reduce its budget shortfall, with the deficit narrowing by an impressive 42 per cent so far this year.  

Nevertheless, Greece’s mountain of debt is forecast to hit a whopping 189 per cent of GDP in 2013 (€346bn), a figure far beyond the International Monetary Fund’s (IMF) “sustainable” rate of 120 per cent of GDP.

Despite the austerity budget passing through Parliament relatively successfully, the government faces more hurdles before it has access to the €31.5bn rescue package.

Disbursement of the next tranche is subject to a “progress report” from the so-called troika – the European Commission, the IMF, and the European Central Bank.

After eurozone financial ministers met in Brussels today to discuss the next installment, Eurogroup chief Jean-Claude Juncker revealed that there had been “no definitive decision” over the funds, despite positive signs.

On Sunday, Prime Minister Antonis Samaras called for Greece's creditors to uphold their end of the bargain.

Just four days ago, we voted the most sweeping reforms ever in Greece. Greece has done what was asked of it … and now it is time for creditors to do what they have promised.

Finance Minister Yannis Stournaras emphasised the importance of speedy disbursement, as Greece fast approaches the €5bn worth of treasury bill repayments on Friday that will likely plunge the country into immediate bankruptcy. He added:

Without the help of the European Central Bank, the refunding of these treasury bills from the banking system will lead the private sector to complete suffocation.

Even if Greece receives the payment, the economy will still face profound challenges. The newly announced austerity package – which was preceded by a separate raft of tax hikes and spending cuts earlier in the week – could further paralyse the economy. Greece is headed for a GDP contraction of 4.5 per cent next year, which would be in sixth year of recession.

Currently, more than a quarter of Greeks are unemployed, with 60 per cent of under 24-year-olds unable to find work – both record highs. The latest austerity measures, which will slash 10,000 public sector jobs in 2013, will no doubt contribute to the widespread malaise and uncertainty that have stultified potential recovery.

The gloomy economic outlook has no doubt been compounded by a rising tide of social unrest in the country, with violence engulfing Athens last week as 80,000 demonstrators battled with riot police after anti-austerity protests turned ugly.

Whilst the 15,000 protesters that gathered outside Parliament on Sunday were largely peaceful, they were no less opposed to the latest measures. In an opinion poll published in Greek newspaper To Vima, 66 per cent of the population opposed the latest budget.

These social reverberations have had a far-reaching effects on Greece’s shifting political landscape as well. A recent To Vima poll revealed that Greece’s leftist party – Syriza – which opposes the bailout, has recently become the nation’s most popular party. If elections were held today, 23.1 per cent of respondents would back Syriza, whilst the incumbent New Democracy party would only garner 20.4 per cent of the vote. 

Alex Ward is a London-based freelance journalist who has previously worked for the Times & the Press Association. Twitter: @alexward3000

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.