The Chairman of the Parliamentary Budget Office (PBO), Giuseppe Pisauro, testified (in Italian) today before the Budget Committees of the Chamber of Deputies and the Senate as part of the preliminary examination of the budget measures for 2018-2020.
In his remarks, Chairman Pisauro analysed the contents of the budget measures, discussing the assessment conducted by the PBO of their overall structure, the consistency of the public finance objectives with the fiscal rules, and the main measures of the package, underscoring its weaknesses and strong points.
Very briefly, the key points addressed during the hearing were the following.
Macroeconomic scenario – The signs of a robust and widespread recovery in the main economies have been confirmed. For Italy, economic indicators signal an expansion in the second half of 2017 that will outpace the projections made in September. Overall, the PBO’s forecasts for the third and fourth quarters (growth of +0.5 and +0.3 per cent, respectively) would produce real GDP growth in 2017 of 1.5 per cent, a slightly faster pace that the PBO’s September projection. In 2018, taking due account of the slightly more favourable carry-over effect of expansion in the second half of this year, GDP growth is expected to be around 1.3-1.4 per cent.
The budget and the public finance policy scenario – The scale of the planned expansionary measures decline over the three-year period, falling from 1.6 per cent of GDP in 2018 to 1.3 per cent in 2019 and 0.8 per cent in 2020. The proposed measures to cover the expenditure – equal to 1 per cent of GDP in 2018 and 0.6 per cent in the two subsequent years – offset the outlays, leading to substantial budget balance in 2020. This virtuous performance, however, is critically dependent on implementation of substantial safeguard clauses (0.7 per cent of GDP in 2019 and 1 per cent in 2020) involving an increase in VAT and excise taxes. Developments in the public finance balances excluding the safeguard clauses would give rise to a much more limited adjustment of the public finances: the 2019 deficit would be at the same level as that envisaged for 2018 (1.6 per cent of GDP), before declining only modestly in 2020 (1.2 per cent of GDP). The credibility of the actual activation of the safeguard clauses has been eroded by repeated measures to sterilise or postpone them. Overall, the public finance scenario reflects a “short-term” approach that undermines the transparency of the public accounts and the predictability of the macroeconomic scenario.
Developments in the debt/GDP ratio – In 2017-2020, the cumulative reduction of debt as a proportion of GDP, equal to about 8 percentage points, is almost entirely attributable to the primary balance, which is in turn is highly dependent on the activation of the safeguard clauses. For 2018-2020, the DBP also confirms the revenue targets for privatisation receipts (0.3 per cent of GDP) without however providing sufficient information to assess whether the programme is feasible, thus representing another risk factor within the policy scenario.
Consistency of the public finance scenario with the European fiscal rules – Partly in light of issues raised in the recent exchange of letters between the European Commission and the MEF concerning the 2018 DBP, compliance with the fiscal rules is exposed to considerable uncertainty. The budget measures set out in the DBP for 2017 are at considerable risk of significant deviation with regard to the path of adjustment of the structural balance (in both annual and biennial terms), and compliance with the expenditure benchmark, owing to the greater rate of growth in total expenditure indicated in the DBP compared with the EFD (1.6 percent, compared with 1.2 per cent).
The main measures discussed during the hearing – For 2018, with a correction in net borrowing of 0.6 per cent of GDP, the gross scale of the budget measures amounts to about €28 billion (1.6 per cent of GDP). For the third year in a row, the largest measure regards the elimination of the safeguard clause (€15.7 billion) while the remaining resources are distributed among a large number of measures for multiple sectors.
Standing out among the most significant areas are contribution relief measures to foster youth employment. Overall, the measures are designed to kick in with the expiry of the 2015 and 2016 contribution relief measures, which terminate in 2018. Another positive element is the permanent nature of the relief, which on the one hand interrupts the sequence of short-term measures and encourages the normalisation of the labour market, while on the other appears consistent with the gradual reduction of the tax wedge on labour.
Among the various measures to support income and reduce poverty, the strengthening of the inclusion income (REI) stands out, making this instrument more universal measure in nature, even if it is subject to means testing and taking part in a customized labour market participation and social inclusion programme.
The 2018 budget package retains the support measures for public investment, with measures involving the various government departments. The initiatives envisage substantial refinancing of the Fund for reviving investment and grant greater financial flexibility to municipalities. The aim of these measures is to reverse the downward trend in public investment over the last seven years, which reflected the uncertainty surrounding the availability of resources and the difficulties of programming and implementing expenditure programmes, a long-standing problem that has recently been made even more challenging by the reform introduced with the new Public Procurement Act. The effectiveness of the new financial resources is highly therefore dependent on the gradual removal of these constraints.
On the resource side, the Budget Bill envisages measures to counter tax evasion and upgrade tax collection efforts (a requirement for electronic invoicing as from 2019, extension of the split payment mechanism for VAT, etc.) totalling €1.9 billion in 2018, €2.8 billion in 2019 and €3.2 billion in 2020. The measures stand out for their quantitative impact and the rising volume of revenue expected, which in view of past experience is difficult to evaluate. If the expansion of the tax base should subsequently generate greater revenues, those resources could play an important role as alternative and less distortive sources of funds than those generated by the safeguard clauses.
