Here are the effects of inflation on the Italian public finances
Here is the great illusion that inflation generates on public budgets: believing that it gives away extra revenue to spend happily. The analysis by Mario Seminerio, editor of the blog Phastidio
We are approaching the moment of the presentation of the Nadef , the update note to the economic and financial document, presented every year around September. The Nadef is used to update forecasts on public revenues and expenditures, in the light of the economic situation. This year's update note is particularly critical because its numbers will indicate the possibility or otherwise of starting to reduce taxes. A rather extravagant idea, given the situation and the structural situation of the Italian economy, but let's pretend to believe it.
In reality, what risks emerging from the Nadef is not the margins to push a few tips in view of the European elections of June 2024 but the awareness of what should have been clear to everyone, for at least a year: the spending estimates were and are excessively optimistic, and the action of corrosive inflation risks causing chasms in real terms, the only ones that matter.
SEVEREST THAN 2012
To observe the public finance numbers we avail ourselves, as often happens, of the excellent analytical work carried out by Gianni Trovati in the Sole . The premise is that inflation has benefited revenues, also thanks to the absence of an automatic indexing mechanism of tax brackets, deductions and deductions, such as to sterilize fiscal drag.
On the other hand, expenditure remained practically unchanged in nominal value (with the exception of pensions), and consequently it was reduced in real terms, ie net of the increase in prices. By comparing the numbers for 2021 with those forecast for 2024 under current legislation (the so-called trend), the extent of this real austerity can be seen first-hand.
Analyzing the period 2021-24, with the final year with unchanged legislation, Trovati reaches this conclusion:
In 2012, for example, in an attempt to extinguish the storm of the spread which had flown to 575 points, Mario Monti's government stopped total spending at 801.1 billion, i.e. in real value, 6.7% less than three years earlier. Today, however, the public finance program provides for outflows of 1,076.8 billion in 2024, with a real cut of 10.4% compared to 2021.
And where is this royal cut concentrated? In the large politically and socially more sensitive aggregates. In healthcare, for example, spending in 2024 should reach 132.7 billion, with a nominal increase of 3.75 compared to 2021 but with a real reduction, i.e. net of inflation, of 11.5%.
Spending on public personnel forecasts a nominal decrease of three billion in 2024, which means a real cut of 10.2% compared to 2021. The PA contracts expired at the end of 2021: 32 billion euros would be needed to recover the inflation of 2022-24. Same real cut, 10.2% affects intermediate consumption of the public administration in the period 2021-24.
In summary, the inflationary shock has led to an increase in nominal revenues which has given the optical illusion of having a "treasure" to use to cushion the damage. Meanwhile, the freeze on nominal spending, apart from pensions, has set the stage for a further deterioration in the performance of large sectors of the public administration. In particular, health expenditure, already heavily compressed in a country that is aging like few others in the world.
With regard to intermediate consumption, which for years has been the focus of thoughtful debates on their compression and efficiency, the problem remains of how to manage the impact of the PNRR on current expenditure. Because this simple relationship has escaped many: the increase in investments induces an increase in current expenditure relating to them.
NO TREASURY, JUST A "LOAN"
This is the great illusion that inflation generates on public budgets: believing that it gives extra revenue to be spent cheerfully and discretionally, when the same should simply be "reserved" for subsequent adjustment of the nominal expenditure. Even partial, of course, to consider productivity recoveries. If this does not happen and the illusory nominal surplus is destined for something else, then the awakening is rough. Remember: the inflation-induced improvement in fiscal balances is just borrowing.
Therefore, some may even be pleased with the slimming cure of public spending, but it would do well to keep in mind that the collapse of health care and current expenditure linked to investments will lead to very serious damage to the country's system. Also for this reason, the 2024 budget law promises to be very difficult. Luckily, there are the revelers who keep us happy with dreams of “tax cuts”. That will only happen for those who can do it, perhaps encouraged by the outburst of compliance that is slowly making its way into the minds of Italians, by dint of being told that there is a need for "fiscal peace".
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/effetto-inflazione-conti-pubblici-italia/ on Sat, 22 Jul 2023 05:13:02 +0000.