The go-ahead for the Stability Law has come from Europe. A decision, however, conditional on the implementation of a further adjustment of the structural deficit, for a total of about 0,3 percentage points, equal to 4,5 billion euros. Thus, a compromise was found between the position of the Italian government, which proposed a correction of 0,1 per cent, and that of the Commission, which asked for compliance with the rules relating to structural budget balance, i.e. the obligation for member countries to reduce their deficit, adjusted for cyclical effects and one-off measures, by half a percentage point a year.
The inevitable "decimals debate" has once again raised the question of the effectiveness of the aforementioned rules. Not a few, in fact, consider that the balanced budget rule should be simplified, if not completely abolished. Professor Guarino, a scholar of public finance and former Minister of Finance, for example, declared in a recent interview with Corriere della Sera that the "Commission has imposed on the Member States the objective of a balanced budget instead of that of sustainable growth ”. And he added that this imposition would not only be legally questionable ("an illegal act", defines Guarino) but also undesirable from the point of view of growth.
In reality, in a union in which the countries have decided to share the same currency but not the same fiscal policy, one cannot do without fiscal rules. They serve to avoid, or at least contain, situations of public finance disorder that risk infecting other member states as well, as demonstrated by the recent crisis. But not only. These rules, and in particular that of the structural balanced budget which obliges countries to draw up credible plans for the repayment of debt and deficit in the medium term, strengthen the effectiveness of budgetary policy and therefore contribute to more sustainable growth within the of the area. Let's see why.
In 1992, the Maastricht Treaty introduced the two cardinal rules that still apply: deficit less than 3% of GDP and debt less than 60%. These limits made sense in the 3s because, with an average real growth of 2% and an inflation rate of 3%, a deficit below 90% would allow for a gradual reduction of public debt (whose European average was around 3 percent). Today, with virtually zero growth and advancing deflation, the thresholds should be updated. That said, the problem with the XNUMX percent is not just that it doesn't allow for debt relief in the face of too low trend growth.
But, it is also to produce pro-cyclical policies, i.e. policies which, instead of contrasting the recession, worsen it. With a budget balance close to 3 per cent, the risk is that, at the slightest slowdown of the economy, the threshold will be exceeded due to the effect of the automatic budget stabilizers: less growth in fact implies more unemployment, less tax revenues, higher expenditure to finance the social safety nets and therefore a higher deficit. Bringing it back - in these conditions - within the Maastricht limit means making an adjustment that risks aggravating the situation even more, and which can trigger a vicious circle between restrictive fiscal policies and GDP contraction.
To remedy this, in 1997, with the Stability and Growth Pact, the "objective of structural equilibrium" was introduced, to be achieved in the medium term. What does it mean? In a nutshell, each member state must continue, not only to maintain its nominal deficit below 3 per cent, but must also tend towards structural equilibrium in the medium term, i.e. have a nominal balance adjusted for the cycle and for measures close to zero. The logic is as follows. In the event of a recession, if the structural budget balance is close to equilibrium, there is sufficient scope to increase the headline deficit and use the automatic stabilizers, while not exceeding the 3% threshold. In this way, the implementation of pro-cyclical fiscal policies is avoided.
Among other things, precisely to avoid pro-cyclical policies, with the reforms of the Pact in 2005 and then in 2011, the speed of convergence towards a balanced budget was also regulated. Under the new rules, the adjustment of the structural deficit must be at least half a percentage point a year. The underlying idea is that of “more in good times, less in bad times”. In "good times", the effort required of countries is more than 0,5% in order to have more flexibility in the negative phase of the cycle. Conversely, in "bad times", the adjustment may be less than 0,5%. This explains why Italy, given the economic situation, got the go-ahead for a correction of 0,3 percentage points.
In addition to mitigating the pro-cyclicality of economic policies, pursuing the objective of a structural budget balance gives greater credibility to government action. Without a medium-term constraint that forces public finances to be brought back into order, an expansionary fiscal policy, carried out in a negative phase of the cycle, can jeopardize debt sustainability if perceived by the markets as an "unlimited" maneuver. This especially applies to high-debt countries. In this case, the expansive effect would be countered by an increase in sovereign risk, which would translate into higher rates and greater financial instability. The ultimate result would be greater uncertainty for investors and savers, and therefore an inevitable worsening of the recession.
In conclusion, it is not the goal of structurally balanced budgets that should be revised, since it helps to strengthen government action and avoid pro-cyclical policies. If anything, the methodology for calculating the structural deficit should be reviewed. Simpler, more verifiable and more communicable procedures, above all to the political class, would make the application of the Medium Term Objective more efficient. This is an important issue on which it would be useful to have a more open debate, as requested by the Italian government.
