Lower taxes for those with more children, payroll tax cuts to be confirmed in the next few years, tax reform with lower rates on individuals and relief for companies that invest. The government program is vast. But the resources?
To understand which and how many resources are available to carry out the priority of the legislature, it is necessary to read the recently approved Economic and Financial Document (Def) of the government. In particular, the tables of the «public finance programmatic framework» included in the section on the Stability Program (basically, Italy’s official deficit and debt targets) should be compared with the section on «Analysis and trends in public finance » (the quantities of revenue and expenditure from 2023 to the next few years). they emerge the profile of an economy for now less dynamic than it has recently appeared and a picture of budgetary constraints to comeand, with a clear responsible: the home-bonus package which should have cost 72 billion euros up to the end of 2022 – according to forecasts – and instead cost 116, 6% of gross domestic product (GDP) in 2022 .
But let’s go in order starting from the economy itself, the basis of the sustainability of the accounts. It has looked more robust recently thanks to the post-pandemic rebounds of the past two years. But the change of pace still remains to be convincingly confirmed. At the end of last year, Italy’s GDP expressed in euros at constant prices (ie net of inflation) was just 0.8% above its pre-Covid levels. Not a bad result at all and no worse than the European averages, but how was it achieved? The Def explains that the almost ninety billion spent only on 110% bonuses and facade bonuses have increased GDP “between 1.5 and 2.5 percentage points”. In other words, every euro of debt created by these two measures has created, in the best of cases, half a euro of growth; but without those bonuses – now running out – the economy would have even decreased compared to 2019.
So it is not obvious that Italy has now moved on and is different from the stagnant one before Covid. However, the government believes in it and plans the ambitious – not impossible – objective of cumulative real growth of 4.9% up to 2026. This is the prerequisite for keeping accounts and for the necessary reduction in debt. Above all, the precondition for these targets is an expected nominal growth – ie including inflation in the account – of 16.6%. It would make the debt smaller, in proportion to the value of the economy. This is not an unrealistic expectation on the part of the government. Yet here emerges the first peculiarity that signals how the budget spaces for Italy are tiny: in the face of an expected growth in the size of the economy of 16.6% in the next four years, the objective of reducing the debt in proportion to the economy itself is just 1.7%.
What’s not going right? The answer lies in the vast and growing gap between the “accrual” and “cash” deficit. The first is the one booked for a certain year, so that it applies to the deficit account. The second is the actual gap between income and expenditure, which must be financed by issuing government bonds and therefore has an impact on debt. Now, in the Def the “cash” deficit (the one that generates debt) is higher than the “accrual” deficit (the one that forms the official deficit) of 20.7 billion this year, of 26.8 billion in 2024, of 33 billion in 2025 and 34.6 billion in 2026. Deviations between the two quantities are frequent, but never so great. Così Italy finds itself with 115 billion more debt than would be understood by looking at the deficit and – given the accounting conventions – these are obviously those of the home bonuses, in the form of unpaid taxes by those who hold the tax credits. So the country is on the verge of a further increase in its already large debt.
But can the government create room to finance its tax promises by cutting spending? In theory, yes. For example, there is talk of reducing many concessions. In practice, however, the public expenditure forecast is already very austere. The government imagines a drop in spending of 4% of GDP (76 billion real, at current values) between 2022 and 2026, net of interest on the debt. Based on the government’s inflation and expenditure forecasts, public employment expenditure is forecast to drop by 10.7% in real terms in 2026; health care down by 9.7% in real terms; that for the functioning of the State (“intermediate consumption”) down by 10.8% again in real terms.
These are very lean numbers over the next few years. A tightening of the belt – assuming it proves to be socially and politically sustainable – without which the debt could rise further. Only the expected expenditure for pensions (up 2.4%) and for investments (up 1.5%) thanks to the recovery plan will increase in real terms between now and 2026. For this reason, for the government to give up part of the Recovery program today would mean weakening the only real economic policy tool it has available in recent years.