The Parliamentary Budget Office presented its annual report today in Rome according to which the excessive deficit procedure will cost Italy a correction of the accounts amounting to 10-12 billion every year. In 2024 GDP revised downwards to +0.8%
If for 2025 the Government confirms some of the interventions financed by the last budget only for 2024 (from cutting the wedge, to the SEZ for the South, from the reduction of the RAI license fee to the tax relief on premiums) the impact on the deficit will be around 18 billion. This is stated by theUpb, the Parliamentary Budget Officein its annual report presented on Wednesday in Rome, underlining that, if other expenses usually included in unchanged policies were added to these 18 billion, such as the costs for the next three-year contractual period of public employees (2025-27), the overall impact on net debt could exceed that indicated in the Def, of just under 20 billion. To this figure must be added the fiscal effort for the correction of accounts by 0.5%-0.6% the year that the EU will ask Italy to open the excessive deficit procedure, and which translates into 10-12 billion euros. The government, explains the Parliamentary Budget Office, has postponed the preparation of the programmatic framework until the presentation of the medium-term budget structural plan (PSG) which should take place by 20 September.
“If objectives in line with the current provisions under current legislation are confirmed in the PSB, it will be necessary to identify in the next budget maneuver suitable coverage for unchanged policies that will be decided to implement and for any new interventions”, we read. “In the Def, it is stated that priority will be given to the refinancing of the tax wedge cut on labor – it is highlighted – In this regard, it will have to be clarified whether it is intended to make the measure structural by identifying corresponding coverage resources”.
Numbers in hand, to the Minister of Economy Giancarlo Giorgetti, 30-32 billion will be needed to develop the next maneuver budget while maintaining the commitment to refinance some measures already in place this year.
GDP will grow by 0.8% in 2024, but the Superbonus remains an unknown
The PBO’s macroeconomic projections “do not differ significantly from those of the Government, but are a little more cautious”, we read in the annual report in which the Parliamentary Budget Office forecasts for 2024 a GDP growth of 0.8%, a temporary acceleration in 2025 to 1.1% and subsequently a new slowdown (to 0.8 percent in 2026 and 0.6 in 2027). “Growth estimates were revised slightly downwards compared to those of last autumn, mainly due to the deterioration of the international context”, the report further highlights. With regard to inflation, a decline in consumer prices of around 1.5% is expected in 2024 and a gradual convergence towards 2% thereafter; “However geopolitical instability is such that inflation in the coming years could be more volatile than expected”, underlines the PBO, according to which the Nominal GDP will grow by 3.5% on average over the two-year period 2024-25, and then slowed down at the end of the period (2027) to just under 3%.
A boost will come from “full and timely implementation” of the Pnrr which could lead to “an increase in GDP of almost three percentage points cumulatively in 2026”. On the other hand, “several elements of uncertainty” hang over public finances, among which the Superbonus and Transition 4.0 stand out. unexpected effects cannot be ruled out”, is the PBO alert
Cavallari (Upb): “Debt is a vulnerability factor for Italy, no to deficit interventions”
For what concern deficit, the PBO reports that in 2023 it was 7.4%, “decreasing compared to the previous year, but still high for the fourth consecutive year”. Furthermore, for the third consecutive year, it continued the decline in the ratio between public debt and GDP, which stood at 137.3%, 17.6 percentage points less than the peak recorded in 2020.” “The ratio between public debt and GDP is expected to increase until 2026, when it would reach 139.8 percent, and then reduce by two tenths of a point in 2027; the debt profile is significantly affected by the huge tax compensations linked to the tax incentives for the construction sector in recent years”, we read in the report
“Italian budget policy is faced with a recovery path aimed at reducing the burden of a high public debt which constitutes a factor of vulnerability for the country’s economy, as well as taking resources away from productive and socially useful uses”, stated the president of the Parliamentary Budget Office Lilia Cavallari (in the picture) in the report upon presentation of the Annual Report. “It is an ambitious path that limits the possibility of carrying out deficit interventions, but which also provides an opportunity to be seized. It’s the opportunity to draw a budgetary policy that looks to the future”.
“Combining growth, social inclusion and sustainability of public finance – continues Cavallari – requires far-sighted and credible budget policies and reform interventions, capable of attacking the weaknesses that limit the potential of the economy and the full development of social rights”. In Italy, even during the pandemic, the production structure has shown “proof of resilience and ability to adapt to significant shocks”. Nonetheless, Italian companies continue to be “undercapitalized and have difficulty growing and establishing themselves, especially in advanced technology sectors, and are less innovative in international comparison”. For the President of the PBO there is “room for one rationalization of the levy on businesses aimed at ensuring neutrality with respect to business financing methods, encouraging the creation of new entrepreneurship and the implementation of investments on the frontier of technology, in particular in less dynamic territories and sectors”.
Speaking of new rules of the Stability Pactwhich according to the PBO will require a minimum consolidation effort for each year could be between 0.5 and 0.6 percentage points of GDP in the hypothesis of an adjustment path in seven years”, Cavallari states that the commitment of recovery “is nevertheless relevant, especially in light of the demographic trends which, in addition to reducing the active population, could lead to an increase in the needs for care, assistance and support for elderly people”. It is a path, he adds, which commits “budget policy to giving continuity to the consolidation effort along the entire horizon of the Plan, in exchange for a gradual nature of action which mitigates the extent of the correction necessary year by year compared to to the previous debt reduction rules”, concludes the president of the Office.
Upb: distortive effects from cutting the tax wedge
Among the measures that the government has said it wants to confirm for 2025 is above all the cutting the tax wedge. According to the PBO, the impact on the progressivity of the cut in the overall tax wedge “is obviously positive”, but the system by income brackets rather than in brackets “alters the profile of marginal tax rates. The distortion is such that it generates a poverty trap close to the two income thresholds beyond which the contribution relief is lowered or eliminated (25 thousand and 35 thousand euros), with marginal rates exceeding 100 percent”.
The increase of just one euro in income, explains the report, “determines a decrease in the discount and therefore in disposable income, of approximately 150 euros when exceeding 25 thousand euros gross and of approximately 1,100 euros when exceeding 35 thousand euros gross. This phenomenon would become extremely relevant if the decontribution were to become permanent.”
Taxation on families: inequality has been created on Irpef
“In the last decade the Irpef has been affected by various interventions that have reduced the tax burden, often to the detriment of the fairness of the levy and its redistributive capacity” underlines the institution led by Lilia Cavallari, in a thematic analysis that shows “the negative effect of fiscal drainage (i.e. the increase in the levy due to inflation, ed) in the ten years considered more than compensates for the positive effect caused by the regulatory changes”.
According to the PBO “for all employees, the regulatory changes have led to a reduction in the levy of approximately 3 percentage points, which is however more than compensated by the effect of the fiscal drain, equal to approximately 3.6 percentage points, with a balance on disposable income negative by approximately 0.6 points. For pensioners and the self-employed, both the effects of the legislation and the fiscal drain are minor”.
“These changes to the personal tax structure were accompanied by one progressive erosion of the tax base of the tax, which reduced the fairness of the levy and its redistributive capacity”, explains the Office, adding that “a significant portion of the income from self-employment was subtracted from the progressivity of the Irpef, resulting in a violation of the principle of horizontal equity of the withdrawal, creating withdrawal disparity both between recipients of different types of income (self-employed workers and employees), and between self-employed workers”. The detailed analysis of the Parliamentary Budget Office does not take into consideration the decontribution provision in force in 2024, i.e. the cut in the wedge which instead, for incomes below 35,000 euros, “more than compensates for the real tax increase”.
Early pensions only with recalculation of checks
The second study talks about pensions and the PBO says it clearly: “It does not appear plausible that measures” which go towards the restoration of less stringent pension requirements “can be self-financing in the short-medium term without weighing on budget balances, taking resources away from other institutions in the pension system welfare”. From here, the consequence is almost obvious: “A possible revision of the exit requirements towards a flexible structure with age and seniority ranges within which the worker can choose, should be accompanied byapplication of actuarial corrections for allowances and quotas of allowances based on salary calculation rules”, explains the PBO, highlighting that the budget law for 2024 which renewed Quota 103 for a further year has already “prudently moved in this direction, but with the significant modification of the recalculation contributory allowance”.
“It cannot be ruled out that the restoration of less stringent pension requirements could facilitate the turnover between generations, the entry into work of the youngest and also the stabilization of those already employed, but the proportions hoped for in 2019 remain far from when, upon the introduction of Quota 100, the first temporary channel for exit with requirements lower than the ordinary ones, it was hoped at least three new employees for each pensioner without particular regard to the contractual arrangements”, concludes the Parliamentary Budget Office.
