The Chairman of the Parliamentary Budget Office (PBO), Giuseppe Pisauro, testified today at a hearing (in Italian) before the Budget Committees of the Chamber of Deputies and the Senate, meeting in joint session, as part of the preliminary examination of the Update to the 2019 Economic and Financial Document (the Update) published on 1 October by the Ministry for the Economy and Finance (MEF). The following outlines the salient issues addressed at the hearing.
The macroeconomic scenario and the endorsement process ‑ After having endorsed the trend macroeconomic scenario for 2019-2020, which was notified to the MEF on 23 September last, the PBO ‒ again drawing on the analysis conducted by the panel of forecasters (in addition to the PBO, the panel includes CER, Prometeia and Ref.Ricerche) ‒ also assessed the policy scenario, which incorporates the effects of the forthcoming budget package and foresees a real GDP growth of 0.1 per cent in 2019 and 0.6 per cent in 2020. Based on the information available on the composition of the budget measures – only very general information, given that its actual structure will only be specified with the 2020 Budget Law ‑ the PBO has endorsed the policy scenario. The forecasts for the main macroeconomic variables lie within an acceptable range of values, although they display some divergence with the projections of the PBO panel on some detailed indicators.
The policy macroeconomic scenario for 2021-2022, a period that is not included within the endorsement horizon, raises the same concerns observed for the trend scenario. In both years, the Government forecasts real GDP growth of 1 per cent, which exceeds the upper bound of the PBO forecasters by one-tenth of a percentage point in 2021 and two-tenths of a point in 2022.
The entire forecast period is clouded by the significant risks to growth already noted for the trend scenario. These factors are connected with a possible deterioration in the international environment as a result of the US-China trade war, its extension to Europe, possible foreign exchange repercussions, a weakening of the Chinese economy and uncertainty over the timing and effective implementation of Brexit.
Additional factors concern market participants’ expectations of an imminent reversal of the long US expansion and the evolution of economic and monetary policies, which have only been partially normalised in recent years and may not have much scope to counter the next recession, thus engendering financial risks, especially for high-debt countries such as Italy. These risks could materialise simultaneously, perhaps at short term, with a major impact on international trade and, consequently, on real GDP growth, especially for the euro area.
The outline of the 2020 budget package and developments in the public finances – In view of the only partial information contained in the Update, an in-depth analysis of the policy scenario will be possible only when the detailed content of the budget measures becomes available. The policy scenario in the Update projects net borrowing of 2.2 per cent of GDP in 2020, unchanged compared with the expected deficit for 2019, and a reduction of 0.4 percentage points of GDP in each year of the subsequent two-year period. This reduction would lower the deficit to 1.8 per cent of GDP in 2021 and 1.4 per cent in 2022. According to the policy scenario in the Update, beginning in 2020 the debt/GDP ratio should follow a path of stable and progressive decline. It is expected to reach 131.4 per cent in 2022, over 4 percentage points of GDP less than the peak forecast for 2019 (135.7 per cent).
The new policy scenario reflects a budget package with a declining adverse impact on the trend nominal deficit over time: 0.8 points of GDP in 2020, 0.7 points in 2021 and 0.5 points in 2022. For 2020 the budget envisages uses of resources in the amount of €29 billion (1.6 per cent of GDP). Of this, €23.1 billion (1.3 per cent of GDP) would be used to abolish the safeguard clauses for indirect tax increases and the remaining €6 billion (0.3 per cent of GDP) would be used to finance unchanged policies, the renewal of a number of expiring measures, new measures including the reduction of the tax wedge on labour (0.15 per cent of GDP in 2020), the revival of public investment, an increase in resources for education and research, and sustaining and strengthening the universal health system. These outlays would be financed by raising about €14 billion in new resources (0.8 per cent of GDP) and more than half ‑ about €15 billion – by increasing the deficit.
As regards 2021-2022, the Update does not provide enough information to assess, even in general terms, how the Government intends to achieve the policy objectives.
Sources of uncertainty and risk factors – A preliminary analysis of the policy scenario allows us to formulate a number of initial comments.
- The majority (about 80 per cent) of the correction planned for 2020 (€14 billion) is achieved with revenue increases, of which about €7 billion (0.4 per cent of GDP) from measures to counter tax evasion. This is a rather ambitious goal, especially when compared with the results achieved in the recent past on this front and would be difficult to achieve only using instruments designed to create conflicts of interest between vendors and customers. Moreover, as often mentioned, it would seem appropriate not to rely on uncertain and sometimes temporary resources to adjust the public accounts.
- The budget package, especially in 2021-2022, will rebalance expenditure in favour of greater capital spending. However, substantial additional investment compared with that already provided for under current legislation (plans call for an increase from 2.1 per cent of GDP in 2018 to 2.5 per cent in 2022) would appear to be a challenge to implement also because they would imply a significant realignment of the public administration towards these objectives.
- Achievement of the deficit ‑ nominal and structural ‑ and debt objectives is still entrusted to the significant safeguard clauses providing for increases in VAT and excise duties, making the short/medium-term scenario uncertain. While the more favourable public finance trend scenario (together with deficit financing) made it possible for 2020 to deactivate almost twice the value of potential increases compared with 2019 (€12.5 billion), the revenue expected from the clauses in 2021-2022 remains high, due in part to an initial level of just under €29 billion starting in 2021.
- The risk factors ‑ above all of an international nature ‑ regarding developments in macroeconomic conditions, especially in 2021-2022, could have inevitable repercussions on the process of adjusting the public finances.
Public finance objectives in light of the fiscal rules – An analysis of the policy scenario underscores numerous risk factors in assessing compliance with the fiscal rules.
Based on the estimates contained in the Update, in 2019 the structural balance rule would be complied with in annual terms while there would be a risk of a non-significant deviation from the two-year average perspective. For 2020, there would be a risk of a non-significant deviation in both annual and two-year terms. If the requested flexibility of 0.2 per cent of GDP for exceptional events (hydrogeological risk) is not granted by the European Commission, the risk of deviation would be significant in both annual and two-year terms.
For 2019, based on the limited information provided in the Update, there would be a risk of deviation for the expenditure benchmark that would not be significant in annual terms and but would be from the two-year perspective. That risk of deviation would be significant in both annual and two-year terms for 2020.
In view of the deviations for both the structural balance rule and the expenditure rule, the Commission is expected to conduct an overall assessment to determine whether there is a risk of non-compliance with the preventive arm of the Stability and Growth Pact.
Finally, there is no compliance with the debt reduction rule over the programming period using either the backward-looking criterion or the forward-looking criterion, or with the cyclical-adjustment criterion.