Here is the accounting cage for the economic policy of the Meloni government
Stakes and margins within which the Meloni government will have to move in economic policy. Giuseppe Liturri's analysis
Those who, in a few days, will assume government responsibilities, it is desirable not to be distracted by the tedious pastime – useful only for filling pages of newspapers destined to be forgotten or, we would like to hope, not even read – of reading notes from a distance .
Those who care about the fate of the country can only be headlong in the pages of the Update to the Def (Nadef) and the budget planning document (Dpb) sent to Brussels a few days ago.
From those numbers it will be necessary to start to find the maximum space available to mitigate the impact of the now inevitable recession caused by the energy price crisis.
This year those documents have even more value, because they mark the watershed between the outgoing and incoming governments. In fact, they only expose the so-called "tendential" part or the legislation in force and the "programmatic" part will be entirely borne by the next government. Those numbers mark the boundary between what Mario Draghi delivers to the next government and what the latter must and can do. They also mark another border, namely what Brussels and the ECB and, with it, the markets, will allow the new government to do. The first border is clear, the second has margins of flexibility to be exploited down to the last cent.
Let's start with the deficit / GDP. Draghi hands over 5.1% for 2022 and 3.4% for 2023 to the next government. Half a point below the 5.6% and 3.9% estimated with the April Def.
How far can the next government go? For 2022, there is about half a point of GDP (just under 10 billion) which will be used to extend the measures already adopted by the Draghi government and expiring in November. It should be remembered that this is essentially the return of the higher tax revenues (for news: August + 23.1% on August 2021) inflated by the VAT revenue calculated on tax bases inflated by inflation. A simple round game.
For 2023, there is already a shopping list reaching around 40 billion. Suffice it to say that the tax credits for gas-intensive, energy-intensive and non-energy-intensive companies, in October and November requested an allocation of 9.5 billion. Then there is the reduction of system charges, the social bill bonus and the 2 points of lower contributions in favor of employees. To this there will be added some qualifying measures for the economic policy of the new government (flat tax up to € 100,000?). It is easy to reach no less than 3 points of GDP which could bring the deficit / GDP ratio between 6% and 7%. But here comes the denominator that benefits from two effects: the multiplier effect of expenditure and the growth of nominal GDP. On the first point, we are truly in uncharted lands: how much additional GDP does an additional 60 billion in deficit generate? There are too many unknowns and this is not the place to venture into dissertations on spending multipliers, a slippery ground that in the past has seen sensational falls . The Mef should have updated their econometric models.
On the second point, something more can be said. The decisive premise is that the deficit / GDP is calculated on nominal GDP (or current prices) which takes inflation into account. And here come the positive surprises. For 2023, real GDP growth (i.e. net of the price increase effect), expected in April, was 2.4%, in September the Nadef reduced it to 0.6% (let's overlook the last correction of the IMF to -0.2%). But nominal growth only underwent a modest correction from 4.6% to 4.4%, because it was supported by a "GDP deflator" – which converts nominal GDP into real GDP – increased from 2.2 % to 3.7%. The GDP deflator has increased due to forecasts of higher inflation and is often a figure very close to the country's consumer price inflation rate. But this time it's different and the difference deserves to be pointed out.
In recent months, a large part of inflation is imported, due to energy products and, since imports reduce GDP, this imported inflation does not contribute to the increase in GDP at current prices. And therefore the growth of the latter is much lower than what we would have expected if inflation were generated only by domestic consumption. We thus note a significant difference between inflation measured on consumer prices (in September equal to 9.5%) and that which contributes to increasing nominal GDP. Suffice it to observe that in 2022, the import deflator is equal to 20.9%, while the GDP deflator is equal to 3%. In 2023 the distances should decrease but the phenomenon remains.
Although weakened by the mechanism just described, in 2023 inflation should contribute to increasing the denominator of the deficit / GDP ratio probably more than that estimated in September. The drastic upward revision carried out between April and September supports this hypothesis.
The good news ends there. Because to define the upper deficit / GDP limit beyond which the unborn government will not be able to go – on pain of being subjected to the arrows of the Commission and the markets appropriately primed by the latter – there are the rules of the Stability Pact that our government in fact he is respecting and, above all, he has already promised to respect with the latest Nadef. Where a precise trace is kept of the process of bringing our structural deficit / GDP closer to the medium-term objective (MTO) which is equal to an astronomical surplus of 0.25%, as if the safeguard clause was not in force. This was the reason why in 2022, the Draghi government fought tenaciously not to make any further "true" budget shifts. Because it necessarily had to show a sharp decrease in the deficit / structural GDP compared to 2021 and thus respect the path towards the MTO.
In 2023, the path traced is the same. The convergence of the structural deficit / GDP towards the MTO requires a decrease of 0.6 percentage points and the safeguard clause activated saves us only, for the moment, the infringement procedure. So, starting from a 2022 structural deficit / GDP of 5.5%, we should go down to 4.9%. Considering that the trend for 2023 is equal to 3.6%, there is a fiscal space theoretically allowed by the Commission equal to just 1.3 points of GDP. About 25 billion, a trifle.
This is in structural terms. However, it should be emphasized that most of the measures to combat the crisis would be targeted and temporary and therefore excluded from this balance (for example, in 2020 the structural balance was 5%, against a net debt of 9.5%).
But here the ECB and the financial market come into play. Even if these are one-off measures, there is always a need for someone to underwrite those government bonds. Between 2020 and 2021, the ECB took care of absorbing almost all the additional Treasury issues (258 billion of state needs) with purchases on the secondary market. Unfortunately, we are now in a situation in which the ECB is even thinking about starting the sale of those bonds, inflation is on the rise and rates as well. Another world.
It is true that in March 2020 the ECB passed in just six days from “we are not here to reduce spreads” to the launch of a 1.850 billion euro purchase program, but the chances that it will do so again are very modest.
So what do you do? There is the ESM – which could disburse up to 400 billion for all eurozone states – and there are the approximately 200 billion loans from the Recovery Fund still available. The political toxicity of these solutions is very high.
But this will be the Piave line of the next government. If he managed to obtain a net debt of no less than 6.5 / 7% with the approval of the Commission and the markets – therefore without accessing EU “rescue” loans – it would be a great political success.
If, on the other hand, the government remains attested along the path already traced by Draghi – deficit / programmatic structural GDP of around 5% – or gives in to the blackmail of EU loans as a last resort to finance itself, then Italians will soon have the opportunity to let people know who, between original and copy, prefer the former.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/bilancio-politica-economica-governo-meloni/ on Tue, 18 Oct 2022 05:07:41 +0000.