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L. Codogno: Italy’s Public Finances - You Can’t Have It All!

image-04/05/2016 - 10:34The Italian government will present its public finance projections by 10 April. Fiscal policy will end up being strongly expansionary in 2016—about 0.5pp of GDP in structural terms. Yet, courtesy of flexibility clauses, the government will likely manage to avoid entering into Excessive Deficit Procedure in May.

The fiscal problem for 2017 looms large, however. Italy will have to deliver a structural fiscal adjustment of at least 0.6pp of GDP, and a previously legislated VAT hike needs to be repealed and replaced with something else. On top of that, Prime Minister Renzi made other commitments that have to be financed as well. It will be an extremely difficult exercise to have it all.

There are two arguments that the government seems to be making: (1) top priority should be given to supporting aggregate demand and (2) without a very gradual fiscal consolidation, the government will lose out to the opposition. Unless the reduction of current expenditures substantially speeds up, the consolidation effort is unlikely to deliver a sustainable reduction in labour taxation and an increase in public investments. Debt/GDP reduction remains fragile and subject to external shocks.

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