Working Paper no. 2/2021

Download PDFAssessing Italy’s public debt dynamics in the medium term with the PBO framework: Illustrative scenario analysis for the post-Covid period

by Cecilia Gabbriellini, Gianluigi Nocella and Flavio Padrini


This paper describes the main tool used by Italy’s Parliamentary Budget Office (PBO) to assess public debt dynamics in the short-to-medium term, i.e. the deterministic DSA framework, and illustrates possible scenarios for Italy’s post-Covid public debt ratio using this framework. The main characteristic of the PBO’s deterministic DSA framework is to consider the feedback effects between fiscal consolidations/expansions and the macroeconomic scenarios. Moreover, the treatment of interest expenditure takes into account a relatively wide range of instruments characterising Italy’s public debt. The results of the illustrative scenarios show that in the 2021-24 period, the debt ratio should decrease, although at a mild rate from 2023, even if nominal GDP growth resulted lower than expected by the government. In the period after 2024, with a neutral fiscal stance and assuming that the current low interest rates gradually return to higher historical levels, projections of the debt ratio depend crucially on the assumptions of post-pandemic trend GDP. If it is assumed that GDP returns to pre-pandemic or higher trend levels, the decline of the debt ratio should continue in the medium term. Conversely, if it is assumed that the pandemic has inflicted a permanent negative “shift” on trend levels (“partial loss” scenario), a reverse towards rising public debt dynamics cannot be excluded. Thus, a neutral fiscal stance from 2025 would not suffice to ensure a declining or stable public debt dynamics in a more conservative, but still realistic, scenario. Alternatively, a significant structural fiscal consolidation from 2025 (half a percentage point each year) could stabilise the debt ratio, albeit at a high level, even in the “partial loss” scenario.


Text of document