Project Link Meeting, New York

Transcription

1 Project Link Meeting, New York October 22-24, 2012 Country Report: Italy from Rapporto di Previsione Ottobre 2012 (Economic Outlook, October 2012); Prometeia Associazione per le Previsioni Econometriche During the Great Recession, Italy was strongly hit by the collapse of the international trade, and the total cost was higher than that of her European main trading partners, as in 2008 Italy was already in recession. Besides the difficulties of the real economy, Italian public finances did not deteriorate as deeply as in the other peripheral European countries. Aware of the public sector constrain, the Government did not adopt discretionary expansionary fiscal policy to soften the recession but left at work the automatic stabilisers. At the end of 2010 the public sector net borrowing requirement was 4.5 per cent of GDP, entirely due to the payment of interests. The stock of the public debt was per cent of GDP (roughly 15 percentage points higher than in 2007) and the spread with respect to the German Bund was 122 basis points. On the whole, Italy seemed less involved in the worsening of the confidence climate than the other peripheral EMU countries. In summer 2011, that is after the bust of the Greek financial crisis, the Irish and the Portuguese ones, the attention of the financial markets focused on the Italian and Spanish situation, as long as the negative effects due to the lack of confidence on the Euro emerged with respect to the real economy. The fast deterioration forced the government to rapidly tight fiscal policy, with the target to restore confidence. Between July and December 2011 three fiscal laws were put in place. In July the government anticipated the three year fiscal law indicating the measures to reach the objective of public sector deficit of 1.5 percent of GDP in 2013 and the 60 percent of the amount necessary to have a balanced budget in This proved to be not enough to reduce the debt financing problem. The second fiscal package approved in August anticipated in 2013 the balanced public sector budget, but did not result in higher confidence towards Italy. In November 2011 a new government, led by Prof. Monti was on hold and in December the new government put in place a third fiscal package, named Salva Italia (Save Italy), which succeeded in reducing the tensions on the financial market: the spread with respect to the Bund decreased. At the same time, the new government put

2 in place a set of reforms in order to simultaneously obtain the resources to reach the objectives, to increase the long run potential growth of Italy and to improve its competitiveness. The reforms approved regard the pension system and the labour market, whereas the Government is still working at a reform of the Justice system. In very broad lines, pension reform, by setting more stringent requirements for retirement, immediately strengthened the financial sustainability of the pension system: the public sector employees have the same treatment as the private sector ones; the age of retirement is increased for both men and women and it is going to be increased in the future in line with the life expectancy, the extension of the contributions based system to all workers is applied. With respect to the labour market, the reform has the objective to increase the flexibility but at the same time to extend the unemployment protection to some categories of workers once not sheltered, through an increase of social contribution. In addition in order to improve competitiveness and to stimulate investments, the Government produced several Decree Laws aiming at increasing liberalisation, at easing bureaucracy for firms and at facilitating private investments. All these law decrees, do not burden on the public sector finance In 2012, in line with the European Semester and the Fiscal Compact, the Stability Programme included in the Economy and Finance Document (EFD) (Documento di economia e finanza DEF) presented by the Italian Government in April confirmed the targets of the public sector deficit below 3 per cent in 2012, a lower one in 2013 matched with a structural surplus and the starting of the process of reduction of the public sector debt as a percentage of GDP. For 2014, the Government expected a balanced public sector budget. Mainly households are burdened with the fiscal consolidation. From the revenue side, it was increased the standard VAT rate by 1 percentage point; property taxes were increased with the application of the municipal property tax instituted by the legislative decree on municipal fiscal federalism. In addition stamp duty on securities and financial instruments and products were increased, taxes on the value of real estate and financial instruments held abroad were introduced and the tax rate on all investment income was equalized at 20 per cent. Excise taxes (on tobacco products and fuel) were increased and some measures with respect to public employment were adopted. On the expenditures side, the rationalization of health spending, and the reduction of local government and ministries spending were introduced. On July 6 th 2012 a new Decree Law (95/2012) was presented in order to review public sector expenditure and reduce them so to raise resources almost wholly derived from expenditure cuts. These resources permitted to lower net borrowing in 2012 by around 0.6 billion, to finance several unforeseen or non-deferrable expenses (including those related to the earthquake in Emilia- Romagna and, from 2014 onwards, to the extension of exemptions from the pension reform) and to offset the effects of the attenuation and postponement of the planned rise in VAT rates.

3 On September 20 th the Government presented an update of the Economy and Finance Document (Nota di Aggiornamento del DEF) presented on April, in line with the requirements of the European Semester, in order to take into account explicitly the developments observed during the year and to check the coherence of the targets with the environment. The macroeconomic outlook is downward revised and due to this negative development the target of balanced public sector budget is not reached in 2014 for the combination of lower revenues and higher expenditures for the payment of interests. The downward revision regards both the effective GDP growth and the potential one, so that the output gap remains negative and widens in the forecasting time horizon with a stronger impact on public finances. It worth noting that, as far as the Government worsened both the effective and the structural budget estimates for 2013, the target of structural balanced budget is reached in 2013 and it is implicitly assumed a less restrictive fiscal stance. In addition, in order to quicken the debt reduction, a program of privatization of the order of 50 bln euro in three years has been planned. On the whole, in 2012 Italy is expected to achieve the objectives of the public sector budget below 3 per cent of GDP and hence to exit the excessive deficit procedure. For 2013, the approval of the Stability Bill, now under discussion and containing the proposal to reduce income tax rates given higher revenues from the VAT rate increase planned for next year, should guarantee the achievement of the target. Fiscal policy is deeply affecting the development of the real economy. Having started its fall in 2011q3, Italian GDP is expected to drop further in the second half of 2012, reaching again the 2009 low by the end of the year and a mild recovery is expected to start next year. This forecast rests on four main elements. The first is the institutional context, wherein Italy is taking part in the ESM. Fiscal policy has already planned the path of adjustment and, in addition, Italy has added to the Constitution the constraint of a balanced structural budget to ensure compliance with the fiscal compact. There would be no reason to ask the country further measures to reduce the budget, but the risk that possible turbulence in the financial markets may cancel out the efforts made over the past eighteen months is still in place. A timely and coordinated request with Spain and Germany to the ESM could minimize the financial and political risks, thus guaranteeing a return to growth. This would be an insurance against financial market turbulence. In the current economic and political scenario, and in the one which we are likely to face in the first half of general elections in our country, long-lasting crisis in Greece, and Portugal again undergoing difficulties a narrowing of the Btp- Bund differential is unlikely to occur. The only way to avoid the risk of a widening spread is to seek intervention by the ECB in the market for government bonds.

4 The second element deals with international trade. Our assumption is that world demand, slowing down between 2011 and 2012 (6.2 per cent in 2011 and 2 per cent in 2012), is expected to accelerate in 2013 (in 2009 international trade collapsed) and, as a consequence, exports are expected to recover mildly. Positive prospects on exports will stop the decline in investment in machinery and equipment and will help to rebuild inventories, after their decline in the last eighteen months. The short-term indicators tend to anticipate this development. The pace of decline in industrial production is weakening and its growth rate is expected to turn positive in the fourth quarter of The weakness of demand for services and construction, affected by the crisis of household consumption and the halt in public investment, will constrain GDP growth until the end of the year (-2.4 per cent compared to 2011). Our fourth element is that household consumption will remain very weak because of the still restrictive fiscal policy. Household expenditure has dropped by 3.7 per cent since the beginning of 2011, reflecting the prolonged deterioration of purchasing power following the first phase of the Great Recession, to which the effects of fiscal tightening have added. In 2013 the Italian economy will emerge from recession, but with a weak recovery, far from precrisis levels and far from the recovery expected of our main European trade partners. The year on year GDP growth will be negative (-0.3 per cent). Only in the following two years there could be the right conditions for growth between 1 and 1.5 per cent. However these growth rates will not be sufficient to recover from past losses. At the end of 2015, the level of real GDP will still be below the pre-crisis level by 3.9 percentage points, the per capita disposable income and the per capita expenditure by 11.3 and 6.6 percentage points respectively, employment by 1.3 million full-time equivalents and by 300 thousand jobs, and finally the unemployment rate will not be lower than current levels. These are the costs that households and firms will have to pay for fiscal consolidation during a recession. We expect that in 2015 this goal will be reached, with a public deficit well below 3 per cent in the previous four years, the zero-target of structural deficit (the relevant indicator for the fiscal compact) substantially reached, and debt on the path of reduction.

5 Italy (y%y) GDP Imports of goods and services Household consumption Public consumption Investments in machinery and equipment Investments in construction Exports of goods and services Consumer prices Real disposable income of households Employment Public sector deficit (as % of GDP) Public sector debt (as % of GDP) Yield on the government m/l term bonds (% points) Prometeia, Economic Outlook, October 2012 lorena.vincenzi@prometeia.it