We publish an extract of the hearing on Def by Luigi Federico Signorini, Deputy Director General of the Bank of Italy, before the Joint Special Commissions of the Chamber and Senate.
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really reduce public debt must be maintained a primary surplus budget of an adequate size for a sufficiently long period. With a primary surplus of the order of 3-4 per cent of GDP, the debt could be reduced to 100 per cent of GDP in about a decade, under certain assumptions about real growth, inflation and interest rates.
Italy achieved much higher primary budget surpluses, of the order of 4,5 per cent of GDP on average between 1995 and 2000. They allowed our country to reduce its public debt by 12 percentage points in less favorable than the current ones. Other high-debt countries have followed the same path.
Since 2013 the incidence of interest expense it has decreased every year; it is today at its lowest level in the last forty years. Even after the current regime of high monetary accommodation ends, the process will continue for some time, if we do not lose market confidence. An important contribution derives not only from the still exceptionally low level of interest rates at issuance, but also from the low level of the differential between the average interest burden and the nominal growth rate of output.
Under current legislation, according to the forecasts of the Def, the primary surplus would reach 3,7 per cent in 2021. This result discounts a contained dynamics of primary expenditure and the VAT increases foreseen by the triggering of the safeguard clauses.
If instead you want to avoid, or contain, the VAT increase and if one is equally determined to take the path of visible and significant debt reduction, alternative sources of revenue increase or expenditure reduction will need to be sought. It suffices to keep in mind that the primary budget surplus, realistically assessed ex ante and verified ex post, remains the compass that allows us to maintain the orientation towards the rebalancing of public finances.
It is this orientation that investors are looking at. If we hesitate now or go back, we will be exposed to the risk of a crisis of confidence, which could make the whole process more difficult and expensive. On the contrary, if a shared intention to act on the structural imbalances of public finance becomes even more evident, the spread could further reduce, making our task easier. So it happened in the second half of the nineties.
The ratio between debt and output is also reduced by acting on the denominator, ie by stimulating growth. Any policy that achieves a non-transitory increase in the growth rate helps to reduce the ratio of debt to GDP in the future. If we want to pursue a budget recomposition that favors growth, it seems preferable, with the same revenues, limit the direct pressure on income deriving from the use of production factors (labor and capital); on the expenditure side, continue to contain current primary disbursements, looking for spaces for boost public investment.
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The full text of the hearing is available for consultation on the Bank of Italy website.
