Analysis. The Italian populists want to break the rules of austerity, but they risk being forced to apply them again later on, and being stuck with the bill for the damage done.

Brussels is skeptical of the Italian government’s magical budget

The EU Commission is not a believer in the economic miracle that Italy’s government is counting on to fund its ambitious budget, projecting growth would reach 1.2 percent of GDP this year and 1.5 percent in 2019.

Even in the best-case scenario, the real percentages will be much lower: likely no more than 0.9 percent for 2018 (the EU are more optimistic, still estimating 1.1 percent) and below 1 percent for 2019 (1.2 percent, according to the Commission’s projection). To reach the level of growth that the government’s budget planning document forecasts would require a great leap forward for the Italian economy.

But that’s what the government, a coalition of far-right and eurosceptic parties, is counting on when it talks about the so-called “growth budget,” which will force the recipients of the poverty aid (improperly called “citizenship income”) to spend the difference between their income calculated for ISEE purposes and the famous number of €780 per month on buying “Italian products.”

If that doesn’t work, the government is alternatively touting a messianic surge in investments, to be achieved with European funds. If no such developments occur, for the government’s projections to hold, in 2019 the public administration as a whole would have to spend just 75 percent of the €2.9 billion that the budget law allocates. The Renzi government, for instance, had similar high hopes—all, of course, to no avail.

The uncertainty generated by the government’s accounting acrobatics, corresponding to many billions of euros, has led the EU Commission to project a large increase in the deficit: no longer just the famous 2.4 percent of GDP, the number offered by the Italians, but rather 2.9 percent in 2019 and even 3.1 percent in 2020.

These big numbers come as a strong rebuke against the overestimation of economic growth on the part of the Italian government. The latter’s representative, Finance Minister Giovanni Tria, has admitted the government did not abide by the previous agreements on the deficit, but is still betting everything on the positive effects of a future “growth” in which many simply do not believe. Trying to allay their doubts, Tria claims to have explained, in his meetings with the Commissioner for Economic Affairs Moscovici, with the Eurogroup and Ecofin, the possible stopgap measures planned by the government in case its forecasts should prove wrong.

The Italian government claims to have been conservative in estimating economic growth and the effect that an increase in tax revenue could have on the public coffers and thus on the level of deficit. What the government actually did, however, in order to get to a forecasted deficit of just 2.1 percent, was to push back the start of the so-called “citizenship income” program to March (or February, or maybe April—there is great confusion on this matter at the moment), and postpone the “Quota 100” pension overhaul until next September. This resulted in a delay of expenditures, and thus a “lightening” of the yearly deficit for the year’s budget. This accounting trick could lead, according to the government’s calculations, to savings which (on paper) would amount to €4 billion.

The problem remains, as always, economic growth: if it ends up being lower than the government’s projections, as seems likely, then these forecasted “savings” would also be lower than planned. In that case, the government’s projections of a progressive lowering of the deficit to 2.1 percent in 2020 and 1.9 percent in 2021 would be rendered completely baseless.

The government seems, in fact, to be preparing for such a development, as it has floated a “safeguard clause” for the budget to the Brussels overseers of the Fiscal Compact. This new instrument, according to Tria, would not imply horizontal cuts on spending or the increase of VAT rates (whose current lower level has to be re-approved every year), but rather a review of spending so that the deficit target already planned would not be exceeded.

It is not entirely clear whether the cuts enacted in such a case would affect only the new expenses approved for the “citizenship income” or for pensions, or other areas as well. The mechanism proposed has a number of paradoxical aspects, which give the impression that the draft budget is a gamble by a government that doesn’t firmly believe in its own generous growth forecasts. One can indeed envision the possibility that the flagship proposals of the 5 Star Movement and the Lega are put into practice, yet the government is forced to cut the resources needed to finance them. It would be an absurd mess—all in addition to the billions in penalties that the country will incur in case the amended draft budget is rejected on Nov. 23.

The Italian populists want to break the rules of austerity, but they risk being forced to apply them again later on, and being stuck with the bill for the damage done. These are the reasons that have led the Commission to write that the Italian government’s “policy measures might prove less effective, having a lower impact on growth.”

Minister Tria has accused the EU of being guilty of a “technical failure” in its estimations; he was referring in particular to the government’s calculation of the nominal growth in public spending and the structural budget balance, which were both challenged by the Commission. Based on a different estimate of potential GDP, the latter indicator in particular would be very different in turn. The Italian Finance Minister argued that the mismatch between the deficit numbers of 2.9 percent (and 3.1 percent) of GDP calculated by the Commission and the 2.4 percent calculated by the Italian government was due to a miscalculation concerning the relationship between the deficit and the nominal GDP.

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