A well-balanced rectification of accounts
There is much discussion in this period about the opportunity to give the European rules governing the public finances of the member states a more growth-oriented application, without losing sight of stability. In our country attention also remains correctly focused on the need to reorganize the budget of public administrations, with particular interest in expenditure. There are many aspects concerning the management and composition of public finances that can influence the development of an economy. Some useful indications emerge by retracing what has happened in recent years.
In 2009, the Italian public budget had recorded a deficit exceeding 80 billion euros, almost double the previous year. In terms of GDP, it had gone from 2,7% to 5,5%, the highest value since 1996. The primary balance, which does not consider interest on debt and therefore provides a more accurate representation of the real balance of accounts, it had returned to being negative for the first time since 1990. Being mainly the result of the recession, the deterioration had affected the public finances of all the main European economies, resulting in some cases to be much more intense than that recorded in Italy.
The correction of public finances in the main European economies
Despite the persistence of the crisis, the following years were characterized by close attention to the rebalancing of the accounts, also due to the strong tensions manifested on the public debt securities market. In Italy, the primary balance went from a deficit of 0,8% of GDP in 2009 to a surplus of 2,2% in 2013. A correction of 3 percentage points in four years is less profound than that achieved in the same period from Ireland, Spain and Portugal, substantially equal to that of France, slightly larger than that of Germany. In assessing the effects that a correction of public finances produces on a country's economy, the scope of the maneuver is not, however, the only element to consider. What is relevant is above all the composition of the measures, with the subdivision between income and expenditure.
Generally, a reduction in expenses, with particular attention to limiting waste, produces better effects for the economy than those obtained by a simple increase in revenue. Over the four years considered as a whole, the Italian maneuver appears well balanced, also in comparison with the other countries. 60% of the 3 correction points was, in fact, obtained from a reduction in the incidence of expenses net of interest on the GDP. Only Ireland did better, with over 80%, but above all Germany.
The German public accounts saw a correction of the ratio between the primary balance and GDP of 2,6 percentage points, the result of a drop of more than 3 points in the ratio between expenditure net of interest and GDP and a simultaneous reduction in the incidence of receipts. Opposite situation in France: the correction of 3 points is the result of an increase in revenues on GDP of 3,6 points partially absorbed by a growth of half a point in the weight of expenditure.
As a result of these four years, the Germans have been able to benefit from a reduction in the tax burden (from 40,6% of GDP to 40,2%), while the Italians have undergone an increase (from 43% to 43,8%). , which is, however, a much smaller result than the one affecting the French (from 44,2% to 48%).
Focusing attention on our country, however, a first peculiarity emerges. The last four years can be divided into two periods. From 2009 to 2011, the ratio between the primary balance and GDP improved by 2 percentage points, as a result of a reduction in the weight of expenditure net of interest on GDP of 2,4 points against a decrease in that of revenues just under half a point, with the tax burden having dropped from 43% to 42,5%.
In the last two years, the correction of one point of GDP is, on the other hand, exclusively the result of an action on revenues, which more than compensated for an increase in the incidence of expenditure. Obviously, in comparing these two periods it should be remembered that the first (2010-2011) was affected by economic growth, albeit moderate, while the second (2012-2013) saw a new broad recession. The maneuvers approved to rebalance the public finances obviously had negative effects on the Italian economy, making the second recession even deeper than it otherwise would have been. In the Economic Bulletin of January 2013, the Bank of Italy estimated the lower growth deriving from the maneuvers approved by the Government at around 2012 percentage point for 2013 and 1.
However, it is appropriate to go and see how the maneuver on revenue, but above all that on expenditure, has been distributed among the various items of the budget. Indeed, it is important to verify whether the negative effects on growth can be limited to a short-term impact or whether, on the contrary, structural effects on the country's development potential should be feared.
More taxes and less contributions in the revenue of the public administrations
Almost all the main euro-area countries have used the revenue package as a measure to rebalance public finances, albeit with varying degrees of intensity. Germany is the only one to have reduced the ratio between total revenues and GDP in the last four years, from 45,2% in 2009 to 44,7% in 2013.
In Italy, it went from 46,5% to 47,7%, an increase which is not very significant in comparison with the other European economies. Indeed, 1,2 percentage points represent a much smaller increase than that achieved by countries that found themselves in particularly difficult situations, such as Greece (+7,5 percentage points) and Portugal (+4,1 ), but it is also equal to about a third of the French one (+3,6) and less than half of the Spanish one (+2,7).
An overview at the European level of how the action on revenues has been distributed among the main budget items shows how in the major economies of the euro area an orientation towards increasing the weight of direct taxes has prevailed against a slight reduction in that of indirect taxes and a significant drop in the incidence of social contributions.
Obviously, there are differences and particularities between individual countries, which deserve to be underlined. France has significantly increased the weight of revenues on GDP, acting mainly on direct taxes, although the country continues to be characterized in comparison with other European economies by a strong incidence of social contributions, which have come to be worth almost a fifth of GDP.
Spain, on the other hand, reduced the weight of social contributions, financing the intervention with a strong action on indirect taxes, which went from 8,8% to 11% of GDP. Germany, which as mentioned is the only country to have reduced the weight of revenues, has shifted part of the levy from social security contributions to direct taxes. This brief description shows how the European countries that are achieving the best results in terms of export performance are also those that have implemented a reorganization of the composition of the levy in recent years aimed at reducing labor costs, with positive effects on competitiveness of national companies.
In Italy, total revenues in 2013 were slightly above €750 billion. In 2009, there were 715. In the last four years, the composition of revenues has changed slightly. The proceeds from direct taxes approached 2013 billion euros in 240, representing 32% of total revenues. IRPEF absorbs almost all of the revenue with over 170 billion. In the last four years, the levy on personal income has shifted slightly from the tax component to the regional and municipal one. Corporate income tax is worth 35 billion euros and represents almost 5% of total revenues, a weight substantially unchanged compared to 2009.
Indirect tax revenue has also increased in recent years, exceeding 220 billion euros and absorbing 30% of total revenue. The weight of VAT has remained above 12%, despite the decline that has affected the last two years as a result of the sharp drop in consumption: the revenue, equal to 85 billion euros in 2009, had reached 97 billion in 2011 and then dropped to 92 last year.
A sharp increase affected the property tax: in 2009 the ICI revenue was equal to less than 9 billion euros, in 2013 the IMU collected almost 20 billion. IRAP revenue is stable, with over 30 billion. 6 2 July 2014 The increase in both direct and indirect taxes financed the reduction in social security contributions. With a total revenue of over 210 billion euros, they accounted for 2013% of total revenue in 28, with a drop of more than 1 point compared to 2009.
The decline in investments by public administrations continues
In 2013, the total expenditure of the Italian public administrations amounted to almost 800 billion euros, a slightly lower amount than the previous year. Of these, more than 80 were used to pay interest on the debt. Excluding this item, the size of which can only be influenced to a small extent by fiscal policy decisions, in the last four years public spending has fallen from 47,9% of GDP in 2009 to 46% in 2013. Looking at how this reduction was distributed among the individual items, however, some critical points emerge. Only 0,3 of the 1,9 percentage point of the overall cut is the result of a reduction in current expenditure net of interest. The remainder is the result of the savings obtained thanks to a substantial reduction in capital expenditure.
Among current expenditure, a significant drop was in the cost of labour. In 2009, spending on public administration employees exceeded 170 billion euros, equal to 11,3% of GDP. In 2013, thanks to the block on turnover and the suspension of contract renewals, it fell to 164 billion, 10,5% of GDP. A slight reduction also affected the cost incurred for social benefits in kind, which for over 90% refer to the health sector, and for intermediate consumption, items that are worth just under 3% and about 5,5% respectively of GDP.
However, these savings were almost entirely absorbed by the increase in the cost of social benefits in cash, which mostly include the outlays relating to the payment of pensions. In 2013, we approached 320 billion euros, over 20% of GDP, also due to the increase that affected the non-pension component linked to the disbursements of social safety nets. A path of greater containment, on the other hand, concerned capital account outflows. Investments by public administrations went from being worth 2,5% of GDP in 2009 to 1,7% in 2013.
In the first year of the crisis, public investments had approached 40 billion euros; in 2013 we dropped to 27, a drop close to 7 2 July 2014 30%. A reduction in spending also affected investment grants; we went from 1,6% of GDP in 2009 to 0,9%. Looking at the whole of how much of the budget is allocated to investment both in the form of public investment and as a contribution to private ones, it emerges that a cut of over 20 billion euros has been made in the last four years.
However, what happened in this period is not only the result of the need to rebalance the accounts in a period of economic difficulty but also the continuation of a trend that had affected previous years. The ratio between total public investments and contributions to private ones and GDP rose from 4,1% in 2009 to 2,7% in 2013, far from the values close to 5% recorded at the beginning of the XNUMXs.
The decline in investments by public administrations affected all the main types of assets. From 2009 to 2013, investments in buildings, which represent almost 40% of the total figure, decreased by about a third. Spending on road works went from 9 billion euros in 2009 to less than 7 billion, with a drop of about a quarter similar to that which affected all other civil engineering expenses, which include, among other things, investments in ports and railway lines, dropped from 6,5 to less than 5 billion.
The reduction in investments appears even more evident if we move from current values to quantities. Adjusted for the price change, public investment combined and the support provided to private investment fell by almost 40% in the last four years, falling to its lowest level since 1990. The cut also affected that part of public investment which is of greater importance as it affects the development potential of the economy. From 2011 to 2013, investments in road works fell by more than a quarter, falling 10 percentage points below the level of 2000. The same goes for other civil engineering works, which collapsed to levels approximately 30% lower than those of the beginning of the last decade.
The changes in recent years have modified the composition of public administration expenditure, accentuating ongoing processes also in the years preceding the crisis. Considering total expenditure net of interest, current expenditure represented 88% of the total at the beginning of the 2009s; in 91 we were at 2013%, in 94 we went up to over 7%. Investments by public administrations have gone in just over twenty years from being worth more than 4% of the total to less than 8%, 2 2014 July 2 with contributions to private investments which today absorb only XNUMX% of what is spent overall.
Some concluding remarks
The correction of the public finances achieved in Italy over the last few years, although significant, does not appear to be of an extraordinary magnitude when compared with that of the other major European economies. An overview shows a certain balance in the distribution of interventions between income and expenditure. Going to look at the details, however, some aspects emerge that deserve attention. Following the evolution of the decisions over the four years considered, we note first of all a tendency to shift attention more towards an increase in revenues to the detriment of containing expenditures.
On the revenue front, the increase in the tax burden appears insignificant in international comparison, above all bearing in mind the final value, which is far from that of other countries. In the last four years, the reduction of taxation on labor also seems less courageous than that followed in other countries. On the expenditure side, the reduction of some current items appears positive. Little can be done about the increase in social benefits in cash, taking into account the maneuvers on pensions already approved. However, the increase in the cost incurred for social safety nets makes an adequate reorganization of the entire system more and more appropriate. The most worrying aspect is, without a doubt, the sharp drop in investment.
A country that already suffers from an inadequate level of infrastructure runs the risk of being further penalized by spending reduction decisions that affect items, such as road works for example, which attract less public attention than what happens for some running costs. The effects on growth of the policies to rebalance the accounts could therefore go well beyond the short term if this trend of constant reduction in investments continues in the next few years.
