State and outlook of the Italian public finances
Starting with an analysis of recent and future developments in the public finance aggregates, the Focus highlights a number of factors that cannot help but influence policy objectives and, in general, the budget policy choices of the next legislature.
After recent years in which, given cyclical conditions, budget policies have sought to reconcile controlling deficits with measures to stimulate macroeconomic growth, the consolidation of the recovery has now shifted attention to the greatest vulnerabilities that afflict Italy, in particular the high level of public debt (132 per cent of GDP in 2016, compared with a euro-area average of 81.4 per cent) and the need to reduce it. A credible decline in the debt/GDP ratio requires further adjustment of the public finances and the determination to address certain critical issues that still characterise the Italian public finance framework.
According to the 2018 Draft Budgetary Plan (DBP), the cumulative reduction of the debt as a proportion of GDP in 2018-2020 (with the ratio forecast to decline to 123.9 per cent at the end of the period) depends not only favourable macroeconomic conditions but also on substantial primary surpluses, which in 2019-2020 are made possible primarily by the increases in VAT and excise duties provided for under the “safeguard clauses”.
The scenario delineated in the DBP is exposed to a number of factors of uncertainty and indeterminacy: the gradual reduction in revenue is partly financed by measures to combat tax evasion, which are difficult to estimate ex ante or of an extraordinary nature; interest rates could be adversely affected by the gradual tapering of quantitative easing and the uncertain outlook for the global economy; expenditure for public employment for this and the next few years depends on the volume of resources needed for contract renewals, which could be greater than those appropriated, and the easing of restrictions on turnover; and privatization receipts are uncertain and limited those that could be generated by real estate divestitures (an average of €1.2 billion a year in the last decade, but less than €1 billion in 2015 and 2016).
These elements of uncertainty are accompanied by a series of critical factors that will have to be addressed in the budget policy choices of the next legislature.
- The possible elimination of the VAT and excise duty increases with no change in budget balances (0.7 per cent of GDP next year, 1 per cent the following year) would require alternative measures to finance the shortfall. Currently, there is no possibility of being granted additional flexibility in the application of the EU fiscal rules along the lines of that which allowed the deactivation of the safeguard clause for 2018 to be largely financed with deficit spending.
- Measures to generate revenue through the reorganisation and reduction of tax expenditures, while officially studied in recent years, have not been implemented, and their rationalisation would have substantial redistributive and sectoral effects.
- It is unlikely that major resources can be recovered from pension spending. In fact, the long-term sustainability of that spending could be jeopardised by unfunded modifications in the existing pension system, especially the changes introduced with the 2011 reform, which produced major current and future savings.
- It seems improbable – and undesirable – for the reduction in public investment under way since 2010 to continue to contribute to deficit reduction, given the substantial funds authorised in recent budget packages.
- After numerous measures, the level of healthcare spending as a percentage of GDP is one of the lowest among the major European countries. It is difficult to see where additional cuts could be made without reducing service quality or the scope of public intervention in this sector.
