If a government capable of avoiding early elections is really born, the definition of the budget maneuver will certainly be one of the most demanding test benches, even if the success of electronic invoicing will guarantee greater tax revenues. But if the maneuver will not only serve to put the public accounts in order but will have to be the heart of an economic policy that lays the foundations for the revival of growth, the game to be played "politically will be anything but a walk in the park". This is what Luca Paolazzi, former Director of the Confindustria Study Center and today senior partner of REF Ricerche, one of the most accredited centers of economic analysis and research, claims in this interview with FIRSTonline. The relaunch of investments and the cut in the tax and contribution wedge will have to be the cornerstones of the new Government's maneuver, but to make a leap in quality, very courageous political choices would be needed: from the abolition of the 100 quota for pensions to the rethinking of the 80 euro and the Citizenship Income. Here because.
If a government not only with an electoral guarantee but with a broader scope is born, the new budget maneuver will be its first test case but, even before defining its contents, what is the economic context in which it is placed? Of continued stagnation or probable recession?
“It is very rare to predict the timing and intensity of recessions. Of course, sooner or later they occur and today there are many conditions for this to happen. But stagnation, understood as a very small increase in global GDP, remains the most likely outcome. However, we certainly have to deal with a very fragile and difficult context.
It is a fragile context, because the great global locomotives, i.e. the United States, China, Japan and Germany, all show signs of fatigue and weakening of growth, albeit with the necessary quantitative and qualitative distinctions, i.e. regarding the composition and speed of growth in each of them. A synchronized slowdown means that negative demand impulses are transmitted from one economy to another and thus end up amplifying. What is worse is that the main and common cause of the unexpected and rapid global slowdown, which began in the first months of 2018, does not cease to act; indeed, if anything, that cause has worsened: the trade war, which created such uncertainty as to block and reverse the expansion of investments, has further screwed up and threatens to turn into a currency war, of which we had a taste with the hint of a controlled devaluation of the yuan.
It is also a difficult environment because central banks have far more scarce ammunition than they did eleven years ago, when the financial crisis erupted and turned into a violent economic contraction. Interest rates are at historic lows and the markets have already priced in the expansionary measures that could be adopted. It would then be necessary to put in place robust expansive fiscal policy measures, but the spaces are limited and concentrated in a few countries. Thus, economic policy is singularly ill-equipped to deal with a possible recession.
This is the picture Italy has to deal with. Which for over twenty years has been suffering from slow growth, so if the world cycle sneezes we'll get pneumonia”.
The winds of recession emerging in Germany and perhaps even in the USA with the inversion of the bond yield curve are the sign that the expansive cycle is ending to a certain extent all over the world or the confirmation that perhaps Larry Summers is not wrong when warns against a possible secular stagnation?
“Secular stagnation is not a school hypothesis, but a reality we have to deal with. Demographic decline and new technologies less fertile in productivity gains lower the growth potential of the world economy. Let us also take into account that the consequences of the financial crisis have not yet been digested. Thus, the world is advancing along a slower development trend than in the past. This is why in the positive phases of the cycle the expansion is more modest than a few years ago and the stagnation or even the recession more frequent. The bond markets read in the economic data that the peak of the cycle is behind them and expect the central banks to act preventively; finding confirmation in the announcements and measures of central bankers. There would be enormous opportunities: think of the environmental issue, which would require massive investments to rapidly reduce greenhouse gas emissions; but it has not yet been decided how to finance them”.
Is the possible German recession only bad news for Italy because it will also slow down our exports or can it become positive if Berlin convinces itself to return to the European locomotive both by multiplying domestic investments and by softening European economic policy and definitively shelving austerity?
“It is easier for a camel to go through the eye of a needle than for Germany to convert to Keynesian thinking, abandoning the philosophy underlying the rigorous conduct of public finances. But putting cultural and philosophical reflections aside, it is clear that even in Berlin the saying "extreme evils, extreme remedies" applies. The finance minister has already announced that he is ready to launch measures for 50 billion euros in the event of a further deterioration in the economy. However, let us not expect a more condescending attitude or something that goes beyond the flexibility we have already made abundant use of in past years with regard to the objectives of fiscal consolidation: the Germans are not mistaken when they believe that the high Italian public debt is a constant a source of instability for everyone and that the knot to untie for Italy is slow growth. They were already worried about it in 2007, before the crisis! Furthermore, it is difficult to solve the puzzle of more economic powers in Brussels and greater control of national public finances in a short time. That's the way, but you can't get there tomorrow and it's not even clear how. Especially since centrifugal forces have increased in recent years”.
Let's go back to the Italian manoeuvre: it is estimated that at least 30 billion will be needed to neutralize the VAT increase, face expenses that cannot be postponed and initiate the first pro-growth measures such as cutting the tax wedge by 4 or 5 billion: they will be raised by increasing other taxes, reducing for real spending or by increasing the deficit and hoping in the good heart of the new European Commission for another dose of flexibility?
“The bill is arithmetically correct, however it could turn out to be economically wrong. Let me explain. The performance of the public finances in 2019 is better than expected and for structural reasons, as Vincenzo Visco underlined a few months ago and as REF searches calculated. The transition to mandatory electronic invoicing reduces VAT evasion and, in cascade, that of direct taxes and social contributions. This means that next year there will also be greater income from IRPEF, IRES and contributions. So that we will have more revenue without having to increase rates, an increase that has a high political cost. This is all the more true if, as we are observing, independent and fixed-term work decreases in favor of permanent work, due to the shift in relative convenience also due to the reform measures of Poletti, which crippled the Jobs Act.
Finally, the reduction in interest rates, due both to the international context and to the budget adjustment maneuver, which will also have effects on the coming year and on the following ones and which has avoided the European procedure for excessive debt, will lead to lower interest expenditure . All this means only one thing: the 2020 deficit is clearly lower than the trend without the safeguard clauses. Let's say 2,7% or perhaps less, against the 3,5% on which many commentators are still thinking. The Parliamentary Budget Office has also made it clear. Therefore, the tonnage of the maneuver will be smaller and will probably be played on some spending cuts and on a little more deficit negotiated with the Commission. Revenue, as mentioned, is already playing its part”.
Is the VAT increase really that bad?
"Absolutely not. In a context of revision of the various items of the public budget, i.e. a maneuver of quality, as Ciampi called it, rather than of quantity, a higher VAT could be used to finance a reduction in social contributions and greater resources for investments. It is certainly not a new recipe: it has been talked about since the 80s of the last century and it has also been used a few times. The real difference compared to then is the extreme weakness of domestic demand and consumption. Therefore it should be handled with extreme caution. But Ciampi himself said that quality maneuvers are the most difficult, because they take away from someone to give to someone else. Therefore, they require cohesive majorities, which have never been seen, not even in the 2008 elections; just remember how that legislature ended: with the super-spread emergency, the Monti maneuver voted by all the major parties and the second Italian recession”.
In concrete terms, how should the maneuver that Italy needs and which, after the season of assistance from the Lega-Cinque Stelle government, focus on development without forgetting budgetary discipline, be conceived?
“Italy urgently needs to relaunch infrastructure investments. I recall that in the years of the crisis public investment was cut by a third. Something has been done to relaunch them, so much so that in the latest DEF, the share of public investment in GDP is expected to rise from 2,1% to 2,6%. But more needs to be done. And then we need to reduce the tax and social security wedge, which in Italy is among the highest in Europe. The abolition of the 100 quota and the rethinking of the 80 euros and the basic income in a truly anti-poverty key can help on the coverage front. Politically it is not a walk, I realize. Nor should we delude ourselves that it is enough to put the public finances in order to relaunch Italian growth, as many believe. But certainly living with the perennial sword of Damocles of financial instability and blood and tears maneuvering that reaches head and neck does not help families to spend and businesses to invest”.
