The Chairman of the Parliamentary Budget Office (PBO), Giuseppe Pisauro, testified today before the Budget Committees of the Chamber of Deputies and the Senate, meeting in joint session, in the preliminary examination of the Update of the 2017 Economic and Financial Document (Update) published on 23 September by the Ministry for the Economy and Finance (MEF).
In his remarks, Pisauro examined the contents of Update, explaining the factors that, on the basis of the information available and within an overall assessment of the government’s forecasts, prompted PBO to endorse the 2017-2018 policy scenario despite the risk of a downward revision for 2018, the year in which the government’s real growth forecast (1.5 per cent) is above the upper limit (1.3 per cent) of the projections of the PBO panel of forecasters (composed of CER, Prometeia and REF.ricerche, in addition to the PBO itself).
In its overall assessment, however, the PBO took account of three factors which contribute to reducing the overestimation risk of the Government’s forecast: a) the possibility that the recovery in the second half of this year will remain strong, with consequent carry-over effects on 2018; b) the acceptability of the quantification of the impact of the budget measures on GDP growth; and c) the plausibility of the forecast for nominal GDP growth (+3.1 per cent next year), the variable that most directly impacts developments in the public finances. At the same time, however, the divergence of the real GDP growth rate for 2018 from that forecast by the PBO panel underscores the presence of considerable forecasting risk.
The risk factors associated with real growth tend to grow for the 2019-2020 period, which lies outside the endorsement horizon. The divergence in the forecast essentially reflects the projection of faster growth in domestic demand than the estimates formulated by the PBO panel, particularly with regard to domestic consumption. It is certainly true that the degree of uncertainty tends to increase for medium-term forecasts, but the policy scenario in the Update is unequivocally optimistic in this regard. Despite the recent improvement in the Italian economy, its structural nature still needs to be verified and, therefore, it seems imprudent to incorporate its impact into medium-term growth assumptions.
The rationale for revising the path of adjustment of the public finances stems not so much from a deterioration in the outlook for the economy compared with last spring, but rather from the changes decided at European level in the procedures for assessing the cyclical position of the economy, which are now based on a broader tool than the calculation of the output gap alone and the definition of the appropriate fiscal stance, which would reduce the effort required to correct the deficit. In assessing the cyclical position of the Member States, the Commission has stated its intention to use, for 2018 at least, not only the estimate of the output gap, but also a broader set of indicators (capacity and labour utilisation, the short- and long-term unemployment rate, inflation, wage growth and the prices of financial assets), also using that basis to assess the adequacy of the policy response.
In this context, Pisauro noted, the new and more gradual fiscal adjustment proposed in the Update compared with the DEF (an improvement of 0.3 per cent in the structural balance for next year, rather than the 0.8 per cent indicated in the DEF, and postponement of substantial achievement of structural balance in the budgetary position by 2020) is more feasible that that set out in the DEF. Complying with the target set for 2020 (with a deficit and primary surplus of 0.2 per cent and 3.3 per cent of GDP, respectively), the scenario in the Update would still put the public finances on a path consistent with debt reduction in middle term.
In a more favourable environment such as that expected, both for the forecast for the economy and the timing of the fiscal correction, a more credible and clearly defined programming of developments in the public finances would be possible and desirable. This would require avoiding further reliance ‑ partially in 2019 and fully in 2020 – on the safeguard clauses for the public finance balances, the cancellation of which would imply an increase in the deficit of 1.1 per cent of GDP in the final year of the forecasting horizon.
Compliance with the fiscal rules this year and next will depend on the presumably more flexible interpretation of those rules at the EU level, to which Italian legislation refers. If the targets required by the so-called matrix were applied rigidly, compliance with the structural balance rule and the expenditure benchmark would appear to be at significant risk of a significant deviation in 2017. For 2018, with a required structural adjustment of 0.3 per cent, compliance with the rules would essentially be achieved in annual terms, while in biennial terms there would be still be a risk of a significant deviation. Finally, the policy path for the public debt as a percentage of GDP, despite the reduction as from this year provided for in the Update, would not be sufficient to ensure compliance with the associated numerical rule by 2020.