Francesco Giavazzi and Alberto Alesina have recently observed that the tax maneuvers in Italy (including that of the Monti government) make the methodological error of considering growth neutral with respect to the entity and, above all, with respect to the distribution between income and expenditure of the maneuvers themselves. Since the overall adjustment of the public finances (summer maneuvers + Monti manoeuvre) weighs cumulatively in the three-year period 2012-2014, for 68% on increases in revenues, Giavazzi and Alesina deduce from this that the recessive effects of the maneuvers risk being much more severe than expected.
According to the Bank of Italy, the summer maneuvers and the one just launched by the Monti government provide for a cumulative adjustment of 48,5 billion (3% of GDP) in 2012, 75,6 billion (4,6% of GDP) in 2013 and 81,2 billion (4,8 .2014% of GDP) in XNUMX. The new corrective maneuver in December was necessary to remedy the evident gap in credibility of the previous government and was quantitatively justified by the deterioration that has occurred in the meantime in the reference macroeconomic framework. Compared to the first formulation of the summer maneuvers (which were based on the MEF's April projections), the Monti maneuver foresees Indeed, on the one hand, real (and nominal) GDP growth almost 2 percentage points lower in 2012 and more than 1 percentage point in 2013 and, on the other, it incorporates a forecast of the average cost of debt 0,7 points higher than in April (remained unchanged until September). (See image).
Nominal GDP growth and the average cost of debt service are key variables for debt stabilisation. As is known, the relationship between the debt/GDP variation (?d), primary balance/GDP (p), average cost of interest on debt (i) and nominal GDP growth rate (g) is summarized by the equation:
(1) ?d = p + (ig)d in (t-1)
where d in (t-1) is the initial debt-to-GDP ratio. It follows that the primary surplus/GDP (-p*) which stabilizes the debt/GDP ratio (i.e ?d=0) And:
(2) -p* = (ig) d in (t-1)
Equation (2) can be used for compare the post-summer maneuvers and post-Monti government stabilization paths, which assume different hypotheses both with reference to the growth of the GDP and with reference to the average cost of the debt. The following tables recompose the scenario data in terms of equation (2) (see second image).
According to MEF estimates for September, the structural primary surplus which would have guaranteed stability to the debt/GDP ratio (-p*) was to be 3,3% of GDP in Italy. This primary surplus value was exceeded in 2012 (-3,7%) and the consequent stabilization of the debt/GDP took place in the same year (at 119,4%). The Monti maneuver must instead compensate for both the worsening of growth (g), and the higher average interest cost (i): to obtain debt/GDP stabilisation, the primary surplus (-p*) overall must now be 4,6% (instead of 3,3%).
The Monti maneuver is therefore sufficient to make the debt sustainable, only if there are no further reductions in the growth rate of GDP and/or further increases in the average cost of debt. As rightly observed by Giavazzi and Alesina, the logic underlying the maneuvers is in fact based on two implicit hypotheses, which are taken for granted (but which, as we will see, are far from certain):
– that fiscal adjustments generate confidence in the markets, reducing the risk premium incorporated in interest rates (and consequently also reducing the average cost of debt service);
– that the fiscal restrictions have no significant effects on GDP growth.
If the second hypothesis is false, skip the first as well: if markets assume that fiscal adjustments will generate a larger fall in GDP than debt reduction, they anticipate an increase – rather than a decrease – in the debt-to-GDP ratio. Which leads them to also demand a higher (rather than lower) risk premium. If the government reacts with further adjustment maneuvers, the situation spirals into a depressive spiral. The whole logic of austerity policies is therefore based on a wager: that restrictive fiscal policies do not depress the economy.
The relationship between debt stabilization and economic growth
The impact of fiscal maneuvers on the debt-to-GDP ratio depends on the following condition:
(3) [ 1 – (tax multiplier) d in (t-1) ] = 1
The “tax multiplier” (m) measures the responsiveness of GDP to decreases in public spending and/or tax increases, i.e. to restrictive budgetary policies. The implicit assumption in neo-liberal adjustment recipes is that the "fiscal multiplier" is always less than unity (m = 1), i.e. that the debt reduction effect dominates the slowdown in economic growth, thus reducing the dynamics of the debt/GDP ratio. If the "fiscal multiplier" were in fact greater than 1 (m > 1), the dominant effect of a restrictive budget maneuver would be to depress GDP growth more than proportionally with respect to debt reduction, with the perverse effect of increase the debt/GDP ratio instead of reducing it.
The actual value of the "tax multiplier" is not easy to identify empirically. However, there is evidence that the value of the tax multiplier (less than 1 under normal conditions), can instead be placed significantly beyond unity in phases such as the present, where recessionary tendencies prevail and where official nominal rates are close to zero.
In the original simulations of the MEF (see third figure), the implicit multiplier assumed on the basis of the estimates is very low (0,47 on average for the four-year period 2012-2014), with a negative impact on GDP growth concentrated in the first year. Some however assume that the value of the multiplier for the Italian economy could today be much higher and be between 1,5 and 26. If this were really the effective value of the fiscal multiplier, one would have to expect that the 2011 maneuvers (those of July-August of the Berlusconi government and the additional one of the Monti government) could have an enormously more violent impact on GDP growth than expected in the official projections: with the multiplier at 1,5, for example, real GDP growth would collapse in 2012 and 2013 (-4,9% and -2,1% respectively) and would return slightly positive only in 2014 (+0,7%) .
In this case the balanced budget would be reached in 2012, but the cumulative adjustments of Berlusconi + Monti would no longer be sufficient to stabilize the debt/GDP ratio before 2014. In fact, the debt/GDP ratio would continue to grow due to the fall in GDP (rising to 126% in 2012 and 129% in 2013 and would stabilize at 126,7% in 2014, instead of falling to 115,7%).
However, the substantial failure of the stabilization objective would be associated with production and social costs that are enormously heavier than those budgeted for. The cumulative loss of nominal GDP between 2012 and 2014 would be as much as 129 billion GDP compared to the scenario envisaged by the Monti government (1.564,3 billion instead of 1.693,7 billion).
Fortunately, the fiscal multiplier is a crude and uncertain measure. But the risk is there.
Attachments: Noera_YouInvest_Impacts of tax measures.pdf
