The program document and the 2024 budget law are under scrutiny not only by the Italian government but also by European Union officials: public spending and debt are high. The National Recovery and Resilience Plan, which has been so much talked about in recent years, has disappeared from the radars altogether as it has not given the expected boost to the growth of the country.
Italian Economy Minister Giancarlo Giorgetti demanded “sacrifices” from everyone, thus causing controversy. But this requirement is more than justified
The word “sacrifice” has reappeared in Italian political debates in the context of possible developments following the expected passage of the country’s Budget Law in 2024. These words were uttered by the Italian Minister of Economy Giancarlo Giorgetti. Is the Minister right in talking about the sacrifices that all Italians must make, or will it really not take much effort to solve the problems? An analysis based on available data, without political rhetoric and polemics, is very useful for a broad discussion.
Italian public accounts: Table 1 uses International Monetary Fund (IMF) data to measure each country’s primary surplus expressed as a percentage of GDP. Italy ends 2024 with a primary deficit of 0.6% of GDP, much better than the European average of more than 1%. This small deficit is necessary given the high ratio of public debt to gross domestic product, which is again close to 140%, much higher than in Germany (63%), France (110%), and Spain (106%). The public debt-to-GDP ratio, which risks spiraling out of control, has risen particularly sharply in the years of the covid pandemic: in 2020-2023, Italy’s average primary deficit was 4.9%, more than any other EU country (except Malta).
Italy’s inefficiency in terms of growth is well illustrated by the overall performance from 2001 to 2024, in which Italy is only slightly ahead of Greece. In the same period, for example, Spain grew six times more than Italy
Real growth: Primary deficits increase aggregate demand and hence economic growth. We don’t know exactly to what extent: it depends on other components of demand, the size of the “Keynesian income multiplier,” and citizens’ expectations of future taxes that will have to be imposed to offset higher debt. Table 2 shows data from the International Monetary Fund describing the cumulative real growth rate over the period 2020-2023, the expected growth rate in 2024, and the overall growth rate over the period 2001-2024. Italy is at a below-average level. In 2024, Italy is ahead of Austria, Estonia, Finland, Germany (which, according to German forecasts, could face decline), and the Netherlands. The 2020-2023, rankings are not much different. The highest average deficit in Europe has neither increased our output nor our above-average incomes. Given that exports grew during this period thanks to the extraordinary strength of some sectors of our industry, and consumption did not fall, we can conclude that primary deficits have a limited effect on growth and may even become a brake due to errors in the utilization of available resources. Moreover, Italy’s inefficiency in terms of growth is clearly visible in the overall indicator for the period from 2001 to 2024, according to which Italy is only marginally ahead of Greece, while Spain grew six times as much as Italy, and France and Germany about five times as much.
Raising taxes would curb rising income inequality, but would become a “betrayal of campaign promises”
Economic maneuvering: There have been many conceptual statements made over the past few weeks, generally unrelated to the macroeconomic picture discussed above. Raising taxes will have the effect of curbing the growth of income inequality, but the move represents a betrayal of voters and a reneging on campaign promises, a matter in which no party wants to be involved. The increase in government debt is complicated by the return of tight fiscal discipline in Europe after a pandemic-related period when all countries were given “total freedom.” Moreover, the new European rules outline a long-term path that should lead to debt reduction for countries. But increasing public spending is also inappropriate, as it already accounts for 55% of Italy’s domestic product. A one-time taxation that might affect certain sectors of the economy is obviously not that difficult to implement, since the number of publicly traded companies in Italy is relatively small, especially given the (small) number of those who realize that a forced levy on listed companies amounts to a mini-patrimonial tax on shareholders. This leaves only the path of cost-cutting, although it seems unlikely that ministries have the technical capacity and political will to come up with proposals that match the needs. Therefore, in the coming weeks we can expect a series of rumors and proposals that will eventually be resolved in a way not entirely agreed with the Italian Minister of Economy.
Italians deserve honesty and transparency, not the opium of illusion
Conclusions: the summary is simple, and it would be good to communicate it clearly and concisely to all Italians, who deserve from those who govern them primarily respect and transparency, not the sweet “opium” of illusions:
The grand narrative around the National Recovery and Resilience Plan (in Italian, Piano nazionale di ripresa e resilanza, PNRR), which kept us believing all the last years, has now disappeared from the radar and is much less talked about. The multi-billion-dollar program that was supposed to allow us to reduce our national debt-to-GDP ratio through high economic growth has failed. The difficulties of our major European partners (Germany in recession, France with an ever-increasing credit spread) are not something we should be happy about and represent another obstacle as these difficulties further complicate our lives. The task is even more difficult than the one we faced in the first twenty years of the euro single European currency: at that time, Europe was growing at a higher rate, and our national debt was smaller. As it stands, long arguments over measures worth a few decimal fractions of GDP won’t solve the problems. In Greek mythology, as the World Historical Encyclopedia reminds us, Scylla and Charybdis were monsters that dwelt in the Strait of Messina, between the “toe” of the Italian boot and Sicily. Scylla was a horrible creature with six heads and twelve legs, and Charybdis was a monster that eventually turned into a deadly whirlpool. We have different ways to relate this story to today: Scylla could be the United States, Charybdis could be China, but Europe could be those very sailors. Or Scylla could be growth, and Charybdis could be our public accounts. In this case, we are sailors who, without any magic bridge, are forced to cross the raging sea.
Table 1: Primary deficits in Europe, 2020-2023 and 2024
Average for 2020-2023 | 2024 | |
Austria | -4.08 | -1.65 |
Belgium | -4.14 | -2.69 |
Croatia | -0.95 | -0.25 |
Cyprus | 1.05 | 3.89 |
Estonia | -2.90 | -2.92 |
Finland | -2.97 | -3.22 |
France | -4.95 | -2.92 |
Germany | -2.60 | -0.73 |
Greece | -2.83 | 2.13 |
Ireland | -0.08 | 2.06 |
Italy | -4.90 | -0.60 |
Latvia | -3.22 | -2.07 |
Lithuania | -1.84 | -1.79 |
Luxembourg | -1.40 | -2.44 |
Malta | -5.77 | -2.98 |
Netherlands | -1.33 | -1.31 |
Portugal | 0.19 | 2.48 |
Slovakia | -4.04 | -5.00 |
Slovenia | -3.56 | -1.91 |
Spain | -4.30 | -0.76 |
Table 2: Real growth in Europe, 2020-2023, 2024, and overall 2001-2024
Average for 2020-2023 |
2024 |
Total for 2000-2024 |
|
Austria | 1.24% | 0.44% | 33.56% |
Belgium | 5.80% | 1.16% | 43.33% |
Croatia | 13.74% | 3.00% | 65.84% |
Cyprus | 14.24% | 2.69% | 81.70% |
Estonia | 2.55% | -0.53% | 86.53% |
Finland | 0.78% | 0.42% | 28.13% |
France | 1.66% | 0.74% | 28.41% |
Germany | 0.70% | 0.15% | 25.83% |
Greece | 5.83% | 2.04% | 4.97% |
Ireland | 30.02% | 1.47% | 191.72% |
Italy | 3.46% | 0.71% | 6.42% |
Latvia | 5.70% | 1.66% | 91.43% |
Lithuania | 8.48% | 2.21% | 123.25% |
Luxembourg | 6.48% | 1.26% | 72.46% |
Malta | 17.94% | 5.04% | 173.48% |
Netherlands | 6.58% | 0.63% | 36.69% |
Portugal | 5.94% | 1.73% | 21.56% |
Slovakia | 4.25% | 2.08% | 113.45% |
Slovenia | 7.87% | 2.01% | 66.40% |
Spain | 2.48% | 1.90% | 36.97% |