Italy's fiscal policy was, on the whole, really less restrictive than that implemented in Spain and Portugal, as they claim some analysts? The thesis is generally based above all on the extent of the changes in the (structural) budget balances, taken as a measure of fiscal austerity, in the years of consolidation that followed the sovereign debt crisis. However, it does not appear entirely convincing to an overall reading of the tax positions experienced by the various countries. In particular, it emerges that the setting of fiscal policy in Italy, constrained by the high public debt, has been persistently unfavorable to supporting the economic cycle, no less - and according to some measures more - than what occurred in the two Iberian economies.
we adopt here, consistent with the suggestions in the literature, the nominal primary balance (ie the general government balance net of interest expenses) in relation to GDP as a measure of the contribution of fiscal policy to the stabilization of economic activity. This measure includes both instruments through which fiscal policy influences the economic cycle, i.e. automatic stabilizers (in a recession, tax revenue falls and disbursements for unemployment benefits increase, thus limiting the decline in GDP) and the discretionary measures decided by the government (changes in expenditure and in the rates of taxes and contributions). In fact, the two components both should be considered because they are “substitutes” for each other for the purposes of regulating the cycle: the larger the automatic stabilizers, the less there is a need for discretionary policies, the effectiveness of which, moreover, decreases the stronger the stabilizers are.
Then distinguishing between the two components, as well as being inappropriate for the analysis of the impact of fiscal policy on the cycle, leads to an area of arbitrariness: the identification of discretionary policy with a measure such as the (primary) structural budget balance suffers from great uncertainty surrounding the estimates, which have proven to be highly questionable, of potential GDP andoutput gaps. Moreover, this is accompanied by a further, albeit minor, factor of uncertainty regarding the estimate of the elasticity of public revenues and expenditures to fluctuations in economic activity.
WHAT THE DATA SAY
Therefore, if we consider the nominal primary balance, Italian fiscal policy contributed negatively, with budget surpluses, to the level of economic activity in all years (except one) of the twenty years of the single currency (1999-2018, figure 1 ). In Spain, the primary surpluses that characterized the first ten years of belonging to the euro rapidly disappeared with the crisis and were never rebuilt, at least until last year. In Portugal, the primary balance was almost always in deficit until 2015 and returned to a deficit in 2017. Focusing attention on the crisis period (2008-2018), which saw the unfolding of a double-dip recession in the three countries and then a recovery of different intensity (in Italy more weaker than elsewhere), the contrast appears stark. Italy's budgetary policy has operated in the direction of subtracting demand from economic activity, with primary surpluses amounting, on average, to 1,3 per cent of GDP.
The sign of the contribution of fiscal policy to Spanish and Portuguese GDP was opposite, with primary deficits equal, on average, respectively to 4,1 and 1,4 per cent of GDP. It should be emphasized that these observations only describe the direct impact of the PA balance (net of interest) on the level of aggregate demand and therefore do not consider any indirect effects, of the opposite sign, which could have passed through the channel of interest rates: the Italian surplus – although insufficient to adequately reduce the debt/GDP ratio – could have favored a trend in lower rates than that which would have occurred in a hypothetical situation of more expansive fiscal policy , thus indirectly contributing to sustaining demand. It is a difficult possibility to verify (rates dropped significantly in that period everywhere, even in the fiscally less virtuous Euro countries), which must in any case be taken into account.
In the period examined, there were strong changes in budget balances which reflected, between 2010 and 2013, the adoption of fiscal austerity policies by all countries considered. The adjustments were more intense in Spain and Portugal than in Italy. But the consolidation for the Iberian economies essentially meant the transition from more expansive to less expansive fiscal policy approaches, but still supporting the level of economic activity. In Italy, on the other hand, the transition was from an overall neutral approach (taking 2010 as the initial reference) towards the restoration of the traditional restrictive position, which was then substantially maintained in the following years.
LITTLE ANTI-CYCLIC POLICY IN THE THREE COUNTRIES
To examine the intensity with which the counter-cyclical function of fiscal policy has been implemented in the three economies, they can be compared the variations of the primary public finance balances with changes in economic activity (figure 2). Given the wide uncertainty that characterizes the estimate of the cycle provided by the output gap, it is adopted as an indicative measure of the economic trend the percentage change in per capita GDP by volume. As can be seen from Figure 2, the three countries are overall united by a substantial weakness in counter-cyclical fiscal policy (including stabilizers and discretionary measures), with primary budget balances that worsen only to a limited extent in correspondence with falls in GDP pro -capita (weak positive slope of the interpolation line).
If it were not, however, for the 2009 figure - when the recession resulted in a partial stimulus thanks to the action of the automatic stabilizers - it would not be found in the three countries no positive relationship between per capita GDP and budget balances. In this common context of weakness in the stabilizing role of fiscal policy, Italy seems to be characterized by a relatively more contained counter-cyclical stance than that of Spain (lower slope of the curve) and slightly higher than Portugal, where the correlation between the primary balance and per capita GDP growth appears even weaker.
WE NEED A TAX SPACE THAT ISN'T THERE
Ultimately, fiscal policy in Italy has had and continues to have a role in containing economic growth, to an extent not very dissimilar to the Iberian countries if one observes the variations in the primary balance, and to a comparatively even more marked extent if one takes into account the direct effect on the level of economic activity of the primary surplus. Fiscal policy in Italy therefore does not appear to have been clearly and unequivocally less restrictive than elsewhere. Fiscal consolidation contributed (along with the sharp rise in long-term real rates in 2011-2012) to plunge our economy into a recession.
La weak recovery that followed was affected by the lack of the anti-cyclical function of the fiscal policy that characterizes our country, for "causes of necessity". An economy that has a per capita GDP still 7 percent lower than pre-crisis levels, an unemployment rate of almost 11 percent, a double unemployment rate, core inflation that travels just above 0,5 per cent and an excess of national savings on investment equal to 2,5 per cent of GDP grows slowly, not because it bumps into the limit of its potential, but because (or at least also because) aggregate demand tends to stagnate.
In this situation, fiscal policy should compensate to the full extent necessary, but cannot do so due to the risk of incurring the so-called recessive expansion, with interest rate hikes more than offsetting the effects of stimulus policies. Italy's dramatic problem, which currently affects other economies to a lesser extent, is that it doesn't have the necessary fiscal space to overcome the demand constraints that hold back economic growth due to the enormous, stubborn public debt (in relation to GDP) that we have been dragging on since the XNUMXs and which, as mentioned, we have not managed to reduce sufficiently when , in the first favorable phase of the euro, we benefited from the bonus of the significant reduction in interest rates.
