Fiscal policy faces difficult challenges in both the short and medium run in light of the recently revealed sharp deterioration in the fiscal position. The latest Stability and Growth Programme envisages a reduction of the general government deficit from 6% in 2004 to below 3% of GDP in 2006, requiring significant corrective action within a period of two years. The public debt remains high, at around 110% of GDP, with large demographic pressures emerging after 2015. The key is to constrain primary expenditure – through spending prioritisation – and limit tax evasion, reducing budget deficit to the levels targeted by Greece’s Stability Programme and making room for lower taxes and enhanced spending in growth-promoting areas. Decisive steps will also be needed to enhance administrative efficiency and reform the health care system, ensuring its financial viability. Tax reform should seek to further simplify the system and to reduce its various distortions of resource...