Tax hikes come into effect in Greece

Tax hikes have come into effect in Greece, as part of the government's economic austerity plan. Consumers are bracing for rising prices and the measure's implementation is being closely watched by markets and the European Union.

A woman carries her groceries in a basket as she shops in a  supermarket on the first day of the implementation of tax increases in Athens March 15, 2010. REUTERS/Yiorgos Karahalis

Tax hikes in Greece are expected to add to government coffers.

The increase in the value added tax, or VAT is expected to generate additional budget revenues of 1.3 billion euros or 0.5 percent of Greece's GDP.

Tax increases on gasoline, cigarettes, electricity and luxury goods are expected to give the government a further 1.1 billion euro boost.

But consumers are not happy. After all, they are the ones footing the bill.

A citizen said, "It will influence the way I shop, surely. Although probably not for food items because that's only about a one percent hike, but other products."

Some large businesses said they would not raise their prices to help ease the burden on consumers. But for SMEs, or small and medium sized enterprises, analysts say since their profit margins are not that large, it could be a tough blow for them.

Constantine Mihalos, chairman of Athens Chamber of Commerce, said, "It's not only the two percent VAT which is affecting the small and medium sized enterprises in Greece, we also have the increase in the fuel cost by indirect taxation which further increases the cost of production and therefore it is impossible for the SME in Greece to absorb such an increase."

Despite some opposition, much of the public has voiced approval for some measures in the fiscal plan such as tax hikes on cigarettes and alcohol, and curbing public sector incomes.

The plan is being closely watched. EU politicians and ratings agencies say faultless execution of the tax hikes and spending cuts will be crucial if Greece is to restore its credibility as a borrower and avoid further unsettling the single European currency.