The Chairman of the Parliamentary Budget Office (PBO), Giuseppe Pisauro, testified today in a hearing before the Budget Committee of the Chamber of Deputies as part of the examination of the 2019 Budget Act. Pisauro noted that, following discussions with the European Commission after the announcement of the possible opening of an excessive deficit procedure and in response to the Commission’s comments, the Government has significantly modified the size and composition of the budget measures and the 2018-2021 macroeconomic scenario set out in the DBP. In his remarks, the PBO Chairman addressed the most significant changes arising from the agreement with the Commission authorities, which have been incorporated in the text of the Budget Act approved by the Senate, underscoring their effects on the main macroeconomic and public finance aggregates, their consistency with the fiscal rules and the most significant critical issues.
Very briefly, the key points addressed during the hearing were the following:
Macroeconomic scenario ‑ Compared with the macroeconomic scenario presented in the Update to the Economic and Financial Document and in the DBP – a scenario that was not endorsed by the PBO – the Government’s new macroeconomic scenario shows a downward revision of growth forecasts from 1.2 per cent to 1.0 per cent in 2018 and from 1.5 per cent to 1.0 per cent next year.
In order to assess the plausibility of the new macroeconomic scenario, the PBO conducted a forecasting exercise for 2018 and 2019 using its own model. A comparison between the macroeconomic scenario prepared by the Ministry for the Economy and Finance (MEF) and that of the PBO shows no differences in the estimates for both growth and nominal variables in 2018. For 2019, while the forecast for real GDP growth is 0.2 percentage points higher, that for nominal GDP growth is consistent. In line with its previous practice, under which the PBO considers scenarios with differences in growth forecasts but the same developments in nominal variables to be acceptable, the MEF forecast for 2019 is considered plausible, although presenting considerable risks of a downward revision. These risks are amplified if the forecasts for 2020 and 2021 are considered.
The public finance objectives and the budget measures for 2019 ‑ The new assessments for economic growth and the structure of the budget package involve changes in public finance balances, both nominal ‑ trend and policy ‑ and structural.
Achievement of the new public finance policy objectives is vulnerable on a number of fronts.
- The public finance framework for 2019 presents transitory elements (with a series of one-off measures) and, above all ‑ as underscored by the creation of a provision of €2 billion to guarantee achievement of the balance ‑ uncertainty, in particular regarding the effective design and the feasibility of the measures (e.g. real estate disposals).
- The changes introduced during the parliamentary drafting process have changed the quality of the budget package, reversing the sign of the overall net impact on investment expenditure and investment grants in 2019 from an initial increase of about €1.4 billion to a reduction of around €1 billion.
- Achievement of the deficit to GDP ratio in 2020 and 2021 is entirely entrusted to the safeguard clauses providing for an increase in VAT rates and excise taxes, which was already significant in the initial text of the Budget Bill and has now been raised further (€23.1 billion in 2020 and €28.8 billion in 2021). In the absence of the clauses, the deficit would rise to 3 per cent of GDP in both 2020 and 2021 (as opposed to 2.8 and 2.6 per cent, respectively, before the changes to the budget package draft), with clear risks for the future sustainability of the public finances.
- The debt to GDP ratio shows an increase in 2018 compared with the previous year (from 131.2 to 131.7 per cent) and a gradual reduction in 2019 (to 130.7 per cent) and in the following two years (129.2 per cent in 2020 and 128.2 per cent in 2021). Conversely, in the absence of the VAT increases, in 2020 and in 2021, the debt to GDP ratio would rise again, albeit slightly.