Now in its fourth year, the Budgetary Policy Report examines the content of the public finance measures set out in the Budget Bill and other accompanying legislation. The Report, which follows up on the Budgetary Planning Report published in the spring in correspondence with the presentation of the Economic and Financial Document (EFD), develops, extends and supplements with ad hoc analysis the testimony given at the hearings before the Budget Committees of the Chamber of Deputies and the Senate of 3 October and 7 November.
The Report is organised into three chapters: the first assesses the macroeconomic environment, recent economic developments and the outlook for the coming years; the second provides an overview of the budget package and its contents, the potential risks to achieving the public finance objectives and the consistency of the policy scenario with the EU fiscal rules concerning the structural balance, expenditure and the debt; and the third examines the most significant measures in the budget package.
The main economic indicators signal the continuation of the recovery at the international level and of the Italian economy. The Government confirms the forecast for real GDP growth of 1.5% in 2017 and 2018. The update of the PBO forecast that takes account of recent domestic and international economic developments and the composition of the budget package set out in the Budget Bill and Decree Law 148/2017 strengthens the forecast for real GDP growth in 2018 (to 1.3-1.4%, compared with the projection of 1.3% formulated in September). For the two subsequent years, the PBO’s September forecasts are essentially unchanged (with GDP growth of 1.4 per cent and about 1 per cent in 2019 and 2020 respectively).
The public finance package for 2018-2020 (Decree Law 148/2017 and the 2018 Budget Bill) contain a series of expansionary measures that decline over the planning horizon, going from 1.6 per cent of GDP in 2018 to 1.3 per cent in 2019, before dropping more sharply in 2020 (0.8 per cent). Net of the sterilisation of the safeguard clauses for VAT and excise taxes (worth €15.7 billion in a total budget package of €28 billion in 2018, of which 70 per cent financed with an increase in the deficit), the values decrease to 0.7-0.9 per cent of GDP. The resources to cover the measures are equal to 1 per cent of GDP in 2018 and 0.6 per cent in the two following years.
Assessed over a multi-year horizon, the public finance scenario incorporating the effects of the budget package features a number of elements that have also characterised the recent past. Essentially, in the first planning year, the impact of the safeguard clause is sterilised, avoiding an increase in tax rates, thanks in part to an increase in the deficit, as part of the dialogue with EU institutions concerning a more flexible interpretation of the Stability and Growth Pact rules. In the subsequent two years, a sharper reduction in the nominal deficit and the “substantial” achievement of structural balance – albeit more gradually than indicated in the EFD last April – still depend on the activation of significant safeguard clause resources: 0.7 per cent of GDP in 2019 and 1 per cent in 2020. Without the clauses, the policy deficit in 2019 would remain at virtually the same level forecast for 2018 (1.6 per cent del GDP) and in 2020 would decline by a few tenths of a point (1.2 per cent of GDP), in line with developments in the recent past. This is attributable to the fact that, net of the clause, the budget package contains revenue measures whose overall impact is temporary (declining from about €6.4 billion in 2018 to €1.7 billion and €1.6 billion in 2019 and 2020) combined with others that increase expenditure (about €1.6 billion in 2018, €6.9 billion in 2019 and €4.2 billion in 2020). Without considering the deactivated clauses, the budget measures presented in Parliament improve the deficit only in 2018, by 0.3 per cent of GDP, and worsen it in the two subsequent years, by 0.3 per cent and 0.1 per cent respectively.
The assessment of the fiscal rules reveals considerable problems for both 2017 and 2018. For 2017, the estimates presented in the DBP imply a risk of significant deviation both for the structural balance rule and the expenditure benchmark. These risks are also underscored by the recent opinion of the European Commission on the DBP. If these developments should be confirmed by outturn data, the budget balance correction procedures envisaged in national legislation on budget balance and, at the EU level, by the Stability and Growth Pack could be activated. For 2018, the structural adjustment envisaged by the Government in the DBP (0.3 percentage points) could be sufficient to ensure compliance with the fiscal rules considering that the Commission has acknowledged the need to avoid hindering the still uncertain recovery in Italy with an excessively restrictive fiscal stance. Nevertheless, that adjustment must be considered a minimum objective and, according to current Commission forecasts, there is a gap of 0.2 percentage points. Finally, the public debt rule is not complied with in 2017-2018 under any of the criteria provided for in the rules. For subsequent years, the sharper reduction in the debt/GDP ratio in the DBP is based on a highly uncertain current legislation scenario, partly due to the fact that VAT rate increases have been cancelled on multiple occasions in recent years. In its opinion on the DBP, the Commission asked the Government for clarifications on its strategy and the actual steps it intends to take to reduce the debt/GDP ratio and ensure compliance with the associated rule.
Excluding the usual measures for the total and partial sterilisation of the impact of the VAT and excise tax safeguard clauses in the first and second planning years, the budget is characterised by a number of measures of significant importance from a financial standpoint and the general design of economic policy and by a large number of small sectoral measures.
Relatively substantial resources are appropriated for public employees, with the renewal of contracts and the targeted hiring of personnel in specific segments of government. Other provisions include measures to support employment (mainly through contribution relief measures), help families and fight poverty, support businesses (including an extension of so-called hyper-and super-depreciation), and support public investment. The main contribution to funding these measures comes from the postponement of the introduction of the new tax on entrepreneurial income (IRI) to 2018 and measures to counter tax evasion and strengthen tax collection. The Report devotes specific studies and sectoral analyses to the main chapters of the budget, their effects and comparisons with similar measures enacted in the past.