The 2020 Budgetary Policy Report widens the testimony given by the Chairman of the PBO, Giuseppe Pisauro, at the hearings before the Budget Committees of the Chamber of Deputies and the Senate of 8 October and 12 November, expanding the analysis with an examination of specific aspects and sectoral issues.
The first of the three chapters of the Report examines the macroeconomic scenario, taking account of the most recent economic indicators. The short-term PBO models point to a slight quarter-on-quarter increase in GDP in the final part of the year, albeit with downside risks. Overall in 2019, GDP is forecast to expand by 0.2 per cent, marginally higher than the projection in the Update to the 2019 Economic and Financial Document (from now on the Update). For next year, the policy scenario contained in the Update and subsequently incorporated in the Draft Budgetary Plan (DBP) envisages growth of 0.6 per cent for the Italian economy, in line with the PBO forecasting panel estimates and which was therefore endorsed by the PBO.
As usual, the PBO quantified the effects of the measures included in the budget package (Legislative Decree 124/2019 and the 2020 Budget Bill) on economic activity, using the MeMo-It econometric model. Overall, these assessments show the budget measures adding about 0.2 percentage points to GDP in 2020, similar to the estimate of the Ministry for the Economy and Finance (MEF) in the DBP.
The second chapter provides an overview of the public finance scenario and an assessment of its consistency with the fiscal rules. First, the trend public administration scenario shows an improvement compared with the EFD, due in large part to the expected savings on interest expenditure (increasing over time and equal, according to the Government, to €17.6 billion in 2022) connected with the actual and expected decline in interest rates. For the portion relating to State securities only, according to an estimate produced using the PBO model, the savings in interest expenditure in the policy scenario would amount to €15.6 billion in 2022, of which about half due to the decrease in the spread between March and September .
The budget package will produce a decline of the deficit in the policy scenario only from 2021. This reduction would reflect the still significant impact of the indirect tax increases provided for in the safeguard clauses. Only one-third of the latter’s impact is eliminated in 2021 and just one-tenth in 2022, while the remaining increases still represent 1.0 and 1.3 per cent of GDP respectively (in absolute value, €19 billion in 2021 and €25.8 billion in 2022). Excluding these revenues, the deficit ‑ in purely mechanical terms ‑ would be equal to 2.8 per cent of GDP in 2021 and 2.7 per cent in 2022, while the primary surplus would fall to 0.3 per cent and 0.2 per cent of GDP respectively. In a further purely mechanical exercise, those clauses would also be responsible for more than half of the planned reduction in the debt/GDP ratio in 2021 and 2022 (about 56 and 65 per cent, respectively). Neither the Update nor the DBP provide policy indications about the future treatment of the safeguard clauses.
Following the publication of the 2020 DBP, the European Commission asked the Minister for the Economy and Finance for clarification on the 2020 budget package. In his reply, the Minister stressed that the fiscal stance is essentially neutral in 2020, in the light of the need to revive economic growth and to begin the transition towards an inclusive and environmentally sustainable growth model. In its assessment of the 2020 DBP, the Commission, based on its estimates, notes the risk of significant deviation from the expenditure benchmark in 2019, both in annual and two-year terms. The structural balance is also at risk of a non-significant deviation in one-year terms and a significant deviation in two-year terms. For 2020, there is a risk of significant deviations for both rules. According to the Commission, Italy is not expected to comply with the debt reduction rule for the debt/GDP ratio in either 2019 or 2020. Overall, the European Commission is of the opinion that the 2020 DBP is at risk of non-compliance with the SGP and therefore invites the Government to take the necessary measures within the national budgetary process to ensure compliance with the fiscal rules.
The third chapter provides a series of more extensive analyses examining the key aspects of the main measures of the budget package and their effects on the categories and sectors involved. Attention focuses in particular on the measures regarding: corporate taxation, with particular reference to the repeal of the mini-IRES, the reintroduction of the ACE and the extension of the additional depreciation allowance mechanism and their overall redistributive effects; changes in the flat-rate tax scheme for self-employed workers and sole proprietorships; the revision of tax expenditures (the limitation of certain IRPEF tax credits for those earning over €120,000 and the permanent reduction to 10 per cent of the flat-rate tax in lieu on rental income from rent-controlled properties); and the package of measures to combat tax evasion. In this area, the initiatives to encourage the use of traceable payment instruments are analysed in the light of similar initiatives in other countries and the ad hoc assessment of their results. Specific analysis is dedicated to tax evasion by self-employed workers and the use of cash by Italian households. Attention is also reserved for the plastic tax, highlighting its macroeconomic impact and potential problems in relation to the current state of European legislation in this field and the experience of countries in which similar initiatives have been implemented.
As for spending measures, programmes for families and the disabled are examined (baby bonus allowance, parental leave, fund for the universal family allowance, help in meeting childcare service costs), the main changes in pension arrangements, also in the light of the new and more recent assessments of the cost savings associated with “Quota 100” early retirement mechanism for the current year and for 2020-2021, and the measures concerning healthcare, local government finance and public investments.
Some of the main results of the analyses contained in the Report are presented below.
Corporate taxation – Using the MEDITA microsimulation model, the redistributive effect of the changes in the IRES system (repeal of the mini-IRES and reintroduction of the ACE) and the extension of super- and hyper-depreciation on both non-financial and financial companies have been quantified. The simulations show that in 2020 non-financial companies as a whole would experience a tax increase equal to 1.1 per cent of tax revenue. The additional tax deriving from the abolition of the reduced rate, amplified by the reduction in the notional rate of return on capital of the ACE, is only partially offset by the extension of super- and hyper-deprecation. Medium-sized and large non-financial companies would incur the greatest increase (around 1.3 per cent of tax revenue), despite being the enterprises that reap the greatest benefits from the extension of super- and hyper-depreciation (between 0.7 and 0.8 per cent of revenue). Symmetrically, smaller non-financial companies receive the greatest benefit (between 0.4 and 0.8 per cent), essentially due to the positive impact of the ACE (on the order of 3 per cent of tax revenue). Finally, financial companies, which did not qualify for the subsidised treatment of retained profits, fully benefit from the reintroduction of the ACE, although the impact is mitigated by the lower notional rate of return on capital (6.7 per cent of tax revenue).
Taxation of sole proprietors and self-employed workers – Despite the changes introduced with the Budget Bill, the tax differential between self-employed workers and payroll employees remains very wide at any given income level. Furthermore, the contrast with the original spirit underlying the introduction of the initial single-rate mechanism – simplifying administration and reducing the tax burden for micro-enterprises only ‑ persists.
Tax expenditures – For high-income taxpayers, the Budget Bill limits or eliminates the 19 per cent tax credit for most categories of expenditure and for donations to non-profit organisations. For all taxpayers, the expenditures affected by the measure (i.e. the amounts on which the 19 per cent credit is calculated) amount to €23.5 billion. These correspond to tax credits (tax savings) of about €4.5 billion, 11.4 per cent of the total tax expenditures involving personal income tax, equal to €41.5 billion in 2020. The selection criterion adopted involves an extremely small group of high-income taxpayers, meaning that the measure does not significantly impact the overall value of tax credits. Those with an income exceeding €240,000 represent only 0.1 per cent of all taxpayers, while those with an income of between €120,000 and €240,000 represent just 0.6 per cent. Accordingly, the tax credits affected by the reform represent only 2.9 per cent of the total, despite the fact that the share of taxpayers in these income brackets who benefit from the credits is almost double that for incomes below €120,000 (over 80 per cent, compared with 48 per cent) and that the average amount of the tax credits is much larger (double if not triple than that of taxpayers with incomes below €120,000).
Flat-rate taxation of income from rent-controlled properties – Estimates performed with the PBO micro-simulation model on the basis of a representative sample of 2015 personal income tax returns indicate that the highest income taxpayers benefited the most from this preferential regime: more than half of the taxable income under the flat-rate mechanisms is in fact received by the richest 10 per cent of taxpayers. The system may however be less regressive if part of the tax savings were passed through to rents, as would appear to be the case in a number of preliminary analyses.
Countering tax evasion – The budget package appropriates significant resources in a special fund to finance the grant of cash rebates for payments made using traceable payment instruments. The cost and effectiveness of the incentive will depend crucially on the way in which the mechanism is designed as well as on effectively altering individual behaviour. We must first consider the possibility that, if not properly designed, most of these reimbursements will go to individuals who already make significant use of traceable payment methods without having an impact in terms of reducing tax evasion. To make the tool effective it would also be advisable to direct reimbursements towards purchases in merchandise categories most affected by tax evasion.
Plastic tax – The official estimate of the expected tax revenue, which is constant over the years, does not incorporate the effects of possible reductions in the production and consumption of plastic packaging due to the disincentive effect produced by the measure, meaning that revenue is probably overestimated, at least for the years after 2021. In addition, the need for reflection on the advisability of introducing the tax more gradually is emphasised, starting at a lower level and progressively increasing it over time. This would allow companies in the plastic sector to adapt to the new tax and, plausibly, to view the measure more favourably. Finally, an assessment of the macroeconomic effects of the plastic packaging tax using the MeMo-It econometric model is presented. The measure’s impact on growth is estimated to be a cumulative decrease of one-tenth of a percentage point of GDP in 2020-2022. The slowdown in growth mainly reflects the more rapid rise in demand-side deflators (the change in the private consumption deflator would increase in cumulative terms by just under half a percentage point over the three-year period). The slower real growth would mainly reflect the lower pace of private consumption spending as well as a slightly negative contribution from net exports. The simulation incorporates a partial transfer of the increased excise taxes onto final prices: it would amount to about 50 per cent in the first year of the introduction of the tax and would rise to 70 per cent in the third. In essence, the simulation is consistent with a tax transmission mechanism in which most of the effects manifest themselves through an increase in prices.
Pensions – Taking account of the additional reduction in expenditure for the “Quota 100” mechanism reported in the financial schedules accompanying the Budget Bill, official estimates of the increase in spending generated by this retirement option have been lowered since July by €1.2 billion in 2019, €2.0 billion in 2020, €1.3 billion in 2021 and €0.5 billion in 2022, bringing them to €2.6 billion in 2019, €5.9 billion in 2020, €7.0 billion in 2021 and €7.4 billion in 2022. The PBO has updated its estimates on spending for the “Quota 100” mechanism using the data published by INPS between March and November 2019 and those of the INPS Monitoring Report until the end of October. These estimates confirm the order of magnitude of the reduction in expenditure expected in 2019 and 2020. There is greater uncertainty for 2021, the year for which a forecasting range is provided that depends jointly on the rejection rate for applications submitted to INPS and the proportion of those who, for various reasons (the reduction in pension benefits, the absolute value of benefits, subjective and personal factors, etc.) and despite having become eligible for the “Quota 100” during the year or in previous years, decide to retire in 2021 (threshold/discontinuity effect). Given the official forecast of a reduction in expected spending for 2021 of €1.3 billion, the PBO has projected a range of between €0.9 billion and €1.2 billion. The threshold/discontinuity effect could be amplified if workers perceived a risk of further legislative regulatory changes that could reduce or eliminate access to the “Quota 100” mechanism after 2021 for those who become eligible by that year or even marginally lengthen the time to reach ordinary retirement channels.
Investment – An initial quantitative assessment of the operation of the “34 per cent criterion” through the identification in the Budget Bill of resources susceptible of “territorial allocation” among those appropriated for capital expenditure would lead, on the basis of a series of assumptions, to the identification of appropriations of close to €9 billion, or just over 17 per cent of the total resources allocated to the categories considered in the exercise (€52.2 billion). The application of the law would therefore ensure that at least 34 per cent of the €9 billion of such appropriations, or about €3 billion, would be allocated to the southern regions, part of which ‑ based on historical data ‑ would have gone to these regions anyway. It must be borne in mind, however, that the appropriation of resources in the State budget is not in itself a guarantee of actual disbursement, due to difficulties in the implementation of spending programmes by local authorities, in particular in these regions, where various indicators point to major implementation issues. Strengthening the efficiency and effectiveness of government entities in general, with specific attention to the South, therefore appears to be an essential element of any support programme in favour of the southern Italy.