Italy’s deficit: a new recipe for the same old story

Conte, Di Maio e Salvini seduti

Originally published at nyta.us on October 12, 2018.

The Italian government approved a new budget plan last month that shocked the stock market and started a heated debate among its citizens.

The plan sets the deficit target at 2.4 percent of the GDP, almost three times the goal of the previous administration. This makes Italy’s situation even worse considering that, in the first quarter of 2018, the country already occupied the second to last place in EU’s debt ranking.

Italy is governed by a two-party coalition formed by the Five Star Movement, a populist group created by a comedian in 2009 now lead by Luigi di Maio, and the League, Matteo Salvini’s far-right party. After winning the elections in March 2018, each insisted on their right to become Prime Minister. Months of negotiations eventually led to the appointment of Giuseppe Conte, an independent candidate, as PM, while Di Maio and Salvini settled as Deputy PM and Minister of Labour and of the Interior, respectively.

The budget plan is one of several promises made by both Di Maio and Salvini during the electoral campaign; Di Maio said that the extra deficit would enable the government to “erase poverty.” However, critics have quickly pointed at its flaws and possible negative outcomes.

One of the plan’s most controversial proposals is that of a universal basic income: a sort of unemployment monthly allowance of 780 euros for unemployed adults. To receive the monthly payment, unemployed adults must register at a job centre and accept one of the first three jobs offered by the centre. Therefore, eligible people would receive the allowance only for a limited period of time during which they are supposed to be actively looking for a job.

The guaranteed basic income was Di Maio’s warhorse during the elections, and it secured him thousands of votes. But its opponents claim that it will incentivize unemployment or encourage irregular work, because people could declare themselves jobless while working illegally.

Another innovation is pension reform. Italian citizens currently retire at the average age of 67. The new law states that, in order to retire, the sum of your current age and the years you have spent in the workforce must amount to 100. This will allow people to retire earlier, forcing the government to pay more pension checks.

Critics of the reform say that the burden of the increased national debt will fall on the younger generations. Alberto Magnani, an economic journalist for the Italian newspaper Il Sole 24 Ore, said that “those that today are 10 years old will have to pay the state a higher amount than their parents did.”

Opponents also questioned whether the funds raised with the increased deficit would be enough to comply with all the promised reforms. Magnani said that the government hasn’t been clear about its financial plans so far, but that a quick analysis shows that the numbers don’t add up: “The only quantified measure is the basic income, for which the planned expenditure is 10 billions euro,” he said. “But actually, it appears that to implement the initiative the needed sum would amount to 60 billions euro.”

The budget plan is also contentious at a European level. The Italian government knew that the new deficit target would clash with the European Commission’s expectations of a planned deficit of no more than two percent of GDP. The Commission will analyze the budgetary plans from October 15 to November 21 and get back to the national governments. It is unlikely that it will approve Italy’s proposals.

Foreseeing this reaction, Salvini and Di Maio already declared that they would not surrender to international and financial pressures. However, following the EU’s severe comments, the Italian Prime Minister held a summit with his deputies and the Minister of Economic Affairs Giovanni Tria. They jointly declared that the deficit will represent 2.4 percent of GDP only for 2019, then gradually decrease to 2.2 percent, and eventually 2 percent during the subsequent years.

The question remains if this will be enough to please the Commission. “This is a step ahead,” said Magnani. “The deficit is not a factor that could determine a collapse in Italy’s financial accounts, and what matters is the final result. The first reactions were strong, but now we need to think straight and clearly”. The stock market, for example, had “a catastrophic first reaction to Italy’s plan presentation, so the immediate impulse was to doubt of Italy’s decisions and fear for a new Greek case. After the initial shock the values rearranged to their normal(ish) levels.”


Originally published at nyta.us on October 12, 2018.

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