Stability Pact, 7-year plan for Italy to reduce debt. In 2041 it will fall to 115% of GDP

Stability Pact, 7-year plan for Italy to reduce debt. In 2041 it will fall to 115% of GDP
Stability Pact, 7-year plan for Italy to reduce debt. In 2041 it will fall to 115% of GDP

The effort that Italy will have to make to put public debt on a downward path as required by the rules of the new Pact is important. But sustainable. What will happen starting tomorrow, when the European Commission transmits to Italy the “trajectory” that public spending will have to follow in the next seven years, has been explained with a detailed analysis by the PBO, the Parliamentary Budget Office chaired by Lilia Cavallari and which yesterday presented its annual report on the tenth anniversary of its institution.

THE ROUTE

To understand the issue well, perhaps it is worth starting from a question: what would happen if Italy let its public finances go on autopilot? That is, if, as they say in technical jargon, it marched with “unchanged policies”. Public debt would rise to 150 percent of GDP in 2031 and 180 percent a decade later, weighed down above all by the aging of the population. In short, the course must be corrected. In a “gradual” and “sustainable” way, as the Minister of Economy Giancarlo Giorgetti said yesterday. And this will be possible with the adjustments over seven years that will have to be included in the Structural Budget Plan that the government will present by 20 September, as required by the new Pact.

Thanks to this seven-year “correction”, the debt will fall to 135 percent in 2031 and 115 percent ten years later. But how much will these adjustments cost Italy? The Parliamentary Budget Office considered two scenarios in its calculations, one with more favorable growth and one with slightly less rapid growth. The annual correction of the accounts should fluctuate between 0.5 and 0.6 percent of GDP per year. It means between 10 and 12 billion euros per year. In the next three years, however, these “corrections” are as if they had already been made. They are foreseen in the “trend” public accounts which, however, do not take into account the measures expiring this year (cutting the wedge, bonuses for mothers, Irpef rates, etc.) and which, according to the calculations of the Parliamentary Budget Office, are valid 18 billion euros. It would cost so much to extend them en bloc. But we will no longer be able to count on the deficit to finance them. Giorgetti explained that “unjustified deviations” can no longer be made to finance the measures. The “illusion” that we can continue to spend without constraints must be forgotten. Budgetary policy will therefore have to be more “selective”. The government will be called upon to choose which measures to pursue and how to finance them and which ones it does not.

THE DIRECTION

Giorgetti indicated the direction in which these choices will move: to support income from work and preserve investments. The cut in the contribution wedge, which alone is worth almost 11 billion, will therefore most likely be confirmed. The money will necessarily have to be found from new revenues or spending reductions. And public spending is the other essential parameter of the new European Stability Pact. Budget policies will have to take the new constraint into account.

The other big question to which the Budget Office Report tries to give an answer is what the trend of net primary current expenditure will have to be in order to make the process of reducing the debt and returning from the deficit coherent in order to lower it to that 1.5% required by the new European rules. According to PBO calculations, the maximum increase in public spending varies on average between 1.8 and 2.1 percent per year. The “trajectory” that Italy will have to respect for its spending and which will be communicated to the government tomorrow, should not deviate too much from these values.

What does this mean? Let’s try to explain it better. The Accounting Office has calculated that the aggregate expenditure (pensions, public salaries, healthcare, local authorities) which the EU will ask us to keep at bay is worth just over one thousand billion. Therefore these items will not be able to increase as a whole, beyond 18-20 billion per year. A lot or a few? Depends. With “current legislation”, i.e. without considering the aid measures that expire this year, net primary public spending would actually drop by 0.1 percent next year, and then rise “only” by 0.9 percent the following year . If the analysis is done with “unchanged policies”, i.e. confirming all the measures on the wedge, on taxes, on birth aid and so on, primary spending would increase by 3.3 percent per year. In this narrow path the government will have to decide which expenses to finance, which to cut and which revenues to potentially increase in order to comply with the new European parameters and keep the debt on the downward path requested by the European rules but above all by the markets that are called upon to underwrite that debt together with the Italian savers.

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