Italian Draft Budget: Mamma Mia!
It was the first time in history, that the European Commission rejected a State’s draft budget. It happened on the 23rd of October when Brussel demanded the Italian government to change its plans.
As stressed out by the Commission’s vice-president Dombrovskis they had “no alternative” after the Italian government wasn’t able to justify the deficit’s increase that it put forth. Now Italy has three weeks to change its draft budget to avoid the opening of procedure for excessive deficit for the violation of the European rules on debt.
But let’s take a step backwards and see what’s written in the draft. First of all, the expected deficit is up to 2,4% from an expected 0,8% in 2019 and 2,1% in 2020 while in 2021 it will decrease to 1,8%. But what would the Italian government do with this extra debt? The measures are a mix of ideas from the two parties that form the government, 5 Stars and Lega. So on the one hand you can find the so called universal basic income which actually is just an unemployment subsidy and on the other hand the so called flat tax which is not a real flat tax but just a tax cut for autonomous workers.
At the end of the day these two main measures alone wouldn’t be the real issue for the draft budget, but they become so when all the other measures such as are added to the equation such as: reduction of the pension age (expenditures for pensions are already 15% of the countries GDP and the average years spent working in a lifetime are among the lowest in Europe), reduction of “industry 4.0” a measure taken under the previous government which reduces the taxes for the firms that invest. There is even a controversial fiscal detail which is written in the draft, despite what the parties say in public, to add an additional revenue of only 0,01% and which is raising many political discontents.
The other two problems with the numbers presented in the draft are the growth and the debt. The growth is actually expected at a figure of 1.5 while all other recent forecasts stop at 1%. The concerns arise since if the growth will be lower then what written in the budget this will bring both deficit and debt to be actually bigger then the ones forecasted bringing them closer to the explosion limit or forcing the government to increase the cuts on expenses. The Italian debt is already 132% of the GDP, second as a percentage in Europe only to Greece. Italy spends over 65 billions of euros on interests for debt each year. This is, as Dombrovskis remembered on the 23rd, the same amount Italy spends each year on education.
As Italy continues falling into this viscous circle, international investors are selling off their government bonds on the fear that the budget numbers are unrealistic. This causes a rise in the interest, making the debt more expensive for the government and making it more difficult for the banks to give credit. The two cause a slowdown in the economy which only makes the numbers more unrealistic and back to the first step.
The next three weeks will be crucial to determine if the government will change the numbers of it’s reforms pushing them further in time or decrease the entity for certain measures in a way that actually helps reduce inequalities and boosts growth without wrecking the public balance. Another option would be to carry on its plans and use this rejection as a weapon in the upcoming European elections in May.
WRITTEN BY NICOLA LIPARI FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA @UNIBOCCONI.IT