Mitsotakis Bets on Tax Cuts Ahead of Greek Election

Greek Prime Minister Kyriakos Mitsotakis has announced a plan to stimulate the country’s economy, reduce unemployment and cut the government debt ahead of Greece’s parliamentary election in spring 2027. In unifying these goals and policies, Mitsotakis borrows a page from the American economist Arthur Laffer, whose theory suggests that if tax cuts are big enough, they will generate so much more economic growth that it results in a net increase in government revenue.

Using tax cuts to stimulate economic growth is unusual in Europe generally and almost unheard of in Greece. One reason may be that the economics literature is by no means settled on the Laffer Curve. On the contrary, it has been the subject of intense debate for decades. Laffer's theory has been derogatorily referred to as “the napkin” by David Stockman, former head of the US president’s Office of Management and Budget.

On the other side are, among others, renowned American economists and Laffer Curve proponents Dan Mitchell and Steve Moore.

Given its contested status, it is legitimate to ask why the Greek prime minister would rely on a hotly debated economic theory. In effect, he is hinging the survival of his government on the general appeal of his Laffer-inspired fiscal policy.

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The Scale of the Plan

The tax cuts themselves are selective in nature but by no means economically insignificant. Select constituencies such as farmers and self-employed workers are favored by the tax-cut package. Retirees and government employees also get tax relief. In addition, Mitsotakis proposes full tax exemption for the first €20,000 ($23,300) earned by families with at least three children.

With a rise in the minimum wage included, the total fiscal value of the proposed reforms would be €3.5bn ($4.1bn).

As a show of confidence in his proposal, the prime minister pledged that by the end of a four-year rollout of his reforms, unemployment would have fallen to 6% from its current 8%. During the same period, the Greek government's debt would be reduced to 110% of GDP.

As of 2025, that debt stood at €363bn ($422bn), or 146% of GDP. Not counting GDP growth, this means a reduction of the government debt by one quarter. This is a significant reduction: each year of that four-year period, the government would have to reduce the debt by an amount equal to 9% of GDP (again not counting GDP growth).

If this debt reduction is supposed to come from increased tax revenue, then Mitsotakis needs economic activity to grow strongly enough to boost tax revenue by more than 16% per year.

Without examining the multiplier and accelerator effects in the Greek economy, it is difficult to assess the potential for success or failure of the prime minister's reform plan. A cursory review of current macroeconomic data suggests that Mitsotakis deserves the benefit of the doubt, but beyond the strict economic assessment of his plan is the question of what other options the Greek government has.

The Austerity Legacy

The goal to reduce public debt could in theory be reached by means of fiscal austerity. In practice, though, that may not be an option. In the years following the financial crisis, Greece endured a long series of deeply unpopular austerity packages, the effects of which are still felt in the nation’s economy.

From 2010 through 2017, the Greek Parliament approved a total of 14 different austerity packages, all including various combinations of higher taxes and lower spending. Since they withdrew significant amounts of money from the private sector, the net effect on the Greek economy was decidedly negative. From 2008 to 2013, Greece lost one quarter of its GDP in real terms, a loss of economic activity that is otherwise unheard of outside wars and emergencies of a similarly destructive nature.

Currently, Greece's GDP is more than 13% smaller in real terms than it was in 2008, just before the crisis erupted.

Among the earlier measures imposed under these packages were a higher value-added tax; higher excise taxes on gasoline, tobacco, alcohol and so-called luxury items; higher import duties on passenger vehicles; a new electricity tax on real estate; a new corporate profits tax; a new tax on higher incomes and pensions; the introduction of income taxes on social benefits; and major increases in income taxes.

In addition to tax increases, the austerity packages also consisted of broad-based cuts in health care and defense spending; cuts in public-sector employee salaries of up to 30%; sweeping pension cuts; the elimination of 60% of all local governments and a massive merger program for public schools.

The government also engaged in widespread sales of public property.

The fiscal size and unrelenting nature of these austerity measures were deemed necessary by the government to end rapidly increasing budget deficits. That was not the case prior to the outbreak of the economic crisis in 2008. From 2001 through 2007, the average deficit in the Greek public sector was just below 6% of GDP, almost twice the ratio permitted by the EU's Stability and Growth Pact. However, the deficit ratio was trending downward at a moderate pace.

That changed in 2008 when in the fourth quarter it exceeded 10% of GDP. The deficit peaked at 16% of GDP at the end of 2009.

When the austerity measures started going into effect, the deficit ratio fell slowly. However, due to the depressing effect on GDP from the tax increases and spending cuts, reductions to the deficit effectively competed with reductions to GDP.

It was not until after the latter bottomed out in 2014 that the budget deficit vanished. By 2017, the Greek public finances showed their first surplus since at least 1995. Since then, the economy has grown by almost 18% in real terms. Though respectable, it is not enough to make up for the loss during the austerity episodes.

Where Growth Could Come from

There is growth potential in the Greek economy, which is shown by its recent economic history. Prior to the austerity era, from 2001 through 2007, the Greek workforce increased its productivity by an average of 3% per year, adjusted for inflation. Real GDP per employed person increased from 11,652 (measured quarterly) to 13,684.

By the same metric, from 2010 through 2019 the annual productivity growth was almost zero. Since then, the Greek workforce has struggled to return to pre-austerity productivity levels.

Greece's unemployment figures point to scope for productivity gains and, with them, new economic growth. Unemployment in general exceeds the eurozone average by 1.5–2 percentage points. Greek youth unemployment is more than five percentage points above the eurozone average.

A transition of unemployed workers into gainful employment is in itself a significant productivity gain. When unemployment falls to a certain level where labor becomes scarce, employers are encouraged to innovate to achieve productivity gains with the workforce they have.

There is nothing in the Greek prime minister’s proposed tax cuts that immediately suggests he will fail to rekindle his nation’s economic prowess. Tax cuts are inherently more growth-friendly than tax increases, but their ultimate success depends on how precisely they can stimulate new economic activity. On that front, it is too early to draw any conclusions regarding the potential of the Mitsotakis package – or what it may mean for his government when voters return to the polls next spring.