Italy's new multi-year budget plan

Tito Boeri, Pietro Garibaldi, 4 July 2007

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The Italian government has approved an economic and financial planning document (‘Dpef’ or ‘Documento di progammazione economica e finanziaria’) with a short-term, limited scope; it plays to present political interests, but not to the interests of public finance – or of the country – in the longer-term. In short, it’s a weak document – for various reasons. First, the ‘Dpef 2008-2012’ outlines a way forward for public finance that’s worse than what the country had last Monday, before the three-day spending spree at Palazzo Chigi. Second, the plan completely postpones (until 2009 and 2010) the public finance adjustment necessary to reach a balanced budget. That’s a tough inheritance for whoever’s in charge three years from now. Third, instead of taking advantage of a positive economic cycle, it delays things. Fourth, it’s a bad sign for pension negotiations – where the government’s stance is now compromised. The real lesson to draw is that delayed reforms (even when based on a law that’s already approved) don’t ever really get implemented.

A business plan for posterity.

Only a few weeks ago, over all the spring hype about the fate of the revenues windfall (the so-called tesoretto, or ‘little treasure’), we had suggested a simple economic policy strategy to the Ministry of Economics: for every euro spent beyond the €2.5 billion announced, the ‘Dpef’ would have had to add a euro to the fiscal adjustment in 2008. The Ministry did exactly the opposite. It decided to spend €6.5 billion, instead of the €2.5 billion that had been announced several times, and simultaneously decided to completely eliminate every adjustment for 2008. This means that the adjustment expected for the 2008 budget plan is zero, while the 2008 deficit will increase 2.2%. For the first time in years, the targets are worse than what the current legislation provides. The path towards a balanced budget is postponed to 2009 and beyond.

An economic and financial planning document should present a multiyear business plan. From this standpoint, the country’s fundamental long-term objective, frequently emphasised by the government, is a balanced budget in 2011. The message coming from this ‘Dpef’ is clear: the onus of making an adjustment to achieve a balanced budget rests entirely with whoever is in charge in 2009 and 2010. It’s no surprise, then, that “serious concerns” have been expressed by the European Economic and Monetary Affairs Commissioner, Joaquin Alumnia, who declared the plan was not in compliance with Eurogroup Orientations, even without having read it closely.  When he does, he will find out that the correction – cyclically adjusted – and net of one-off measures is only 0.2 per cent instead of the 0.5 required by the Stability and Growth Pact (table III.12).

After three days of extensive negotiations at Palazzo Chigi, the government approved a spending decree of €6.5billion. And to that, add the costs of the as-yet-unapproved “softening” of the increase in retirement age. The ‘Dpef’ assumes, in fact, that the Maroni reform is still in place, and that any phasing out of the increase in retirement age will be financed entirely. With new taxes? It’s a legitimate question – because there’s no trace of spending cuts.

What’s in the decree?

But let’s look at how these €6.5 billion were spent. The government pinpointed 3 uses: €2.3billion for “social” interventions, €2.3billion for infrastructure projects and work-related tax rebates, and the rest for a host of various expenditures, including €700m for Ministries’ expenses.

Of course, some of these miscellaneous expenditures are necessary, even if they’re sometimes impromptu, and not part of a clear reform plan, as in the case of ordinary unemployment subsidies. Italy needs better coverage of unemployment risk for small-business workers and those early in their careers, but this can be accomplished for almost zero cost by reordering the number of unemployment benefit schemes, which are presently skewed in favour of agricultural workers and big-business employees. The government, rather, has pinpointed €600m for ordinary unemployment benefits without reforming any of the existing institutions.

It was also decided that the state should pay pension contributions to temporary workers. The reform of the labour market, and the welfare and working future of “dual” workers, are among the questions at the heart of the matter; we have in the past proposed the introduction of a single contract aimed at stability for zero cost to the State, convinced as we are that dualism is a problem of the labour market, not the pension system. In the interest of the country, the pension system must maintain a strict contributory logic: future benefits should be strictly proportional to actual contributions. The government’s decree does not uphold this logic.

The idea of providing incentives for overtime, with reduced social contributions, also raises many doubts. It’s not a priority in a country whose main problem is too few workers, as opposed to people who don’t work enough hours. Incentives for firm-level bargaining were also introduced, which are difficult to enforce; they are subject to abuse and make the payroll even less transparent.

A bad sign

The biggest worry is the bad omen handed down from the powers that be: the ministry had promised us “real reform”, and no wild spending cuts. Between the ‘Dpef’ and the spending decree, there’s neither reform, nor spending cuts, but just more of the old logic of “tax-push” – tax-driven public spending: when revenues go up, public spending always increases. There’s always time for reform – later (that is, never). Because the simple lesson that comes from the missing adjustment to the transformation coefficients (required by a 1996 law) and the phasing out of the increase in retirement age (as set by a 2004 law) is that even when reforms are envisaged under an  already-approved law, they aren’t ever really made. It’s a question of time inconsistency. If that’s the way things really are, it would be better to stop passing laws with delayed provisions – they’re pure hypocrisy. And an economic and financial plan that leaves future generations to deal with adjustments doesn’t need so many pages – certainly much fewer than 172.

 

 


Translated from the original Italian version, available at
www.lavoce.info

 

Topics: Politics and economics
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Professor of Economics at Bocconi University, Milan; Scientific Director of the Fondazione Rodolfo Debenedetti and the founder of LaVoce. CEPR Research Fellow

Pietro Garibaldi, a national of Italy, is currently a Professor of Economics at the University of Turin, and director of Collegio Carlo Alberto. CEPR Research Fellow