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Italy : Public Debt Will Not Drop Despite Low Deficit

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ITALY: Public debt will not drop despite low deficit
The country’s budget deficit is likely to decrease, while public debt is not
Italy’s public debt will not start decreasing this year, despite the good momentum of the domestic economy, due to the legacy of past governments, geopolitical factors and delays in implementing the public spending review. A recent Constitutional Court ruling [http://www.cortecostituzionale.it/actionSchedaPronuncia.do?anno=2015&numero=70] on the 2012 pension reform shows how risky a significant deviation from austerity policies could be. Compliance with the Maastricht criteria and avoiding the ‘excessive deficit’ procedure is good news. However, even with a 3% deficit, the debt will increase.
Impact
• The Court’s ruling shows how difficult might be for Italy to meet the European Commission’s debt and deficit goals.
• The government could use the ‘safeguard clauses’, eg, an increase in VAT and fuel taxes.
• However, this option is not politically viable and economically sensible if the deficit remains below the 3% limit.
• If in September 2014 ISTAT had not changed its GDP methodology, public debt would now stand above 135% of GDP.
What next
The high public debt poses a threat to financial stability and is the largest hurdle for the pro-growth measures of the Italian government to boost the economy more strongly. With debt at 132% of GDP and 270% of the individuals’ tax base, the key for the debt sustainability lies in the ECB ability to keep
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