View
227
Download
0
Category
Tags:
Preview:
DESCRIPTION
Il Corriere della Sera ha commissionato uno studio economico sui programmmi dei partiti politici in corsa per le perossime Politice. Questo il rapporto realizzato dalla organizzazione indipendente inglese.
Citation preview
Impact of the economic measures proposed by Italian parties
February 2013
A report for Corriere della Sera
Contents
Executive Summary.................................................................................. 3
1 Introduction ..................................................................................... 5
2 Measures proposed by the Italian parties ...................................... 7
2.1 Fare per Fermare il Declino ........................................................................ 7
2.2 Partito Democratico .................................................................................... 8
2.3 Popolo della Libertà .................................................................................... 8
2.4 Scelta Civica – Con Monti per l’Italia .......................................................... 9
2.5 Similarities between the proposed measures .......................................... 10
3 Simulation results ......................................................................... 11
3.1 Input variables and OE assumptions........................................................ 11
3.2 Measures of the economic impact ............................................................ 12
3.3 Results and comparison ........................................................................... 14
4 Conclusions ................................................................................... 18
Appendix ................................................................................................. 19
3
Executive Summary
Background
The election which will be held in Italy on February 24th and 25
th 2013 is likely to
shape the prospects of the Italian economy for many years to come. Rising
unemployment, high public debt and low competitiveness are only some of the
challenges that the new government will face.
The competing parties proposed different sets of policies to boost growth and
employment while keeping the process of fiscal consolidation on track. Corriere
della Sera, one of the most prominent newspapers in Italy, wanted to test the
economic impact of the proposed measures with the help of an independent
economic consulting company. Oxford Economics used its Global Economic
Model to quantify the impact of proposed policies on the economy. The Global
Economic Model of Oxford Economics is used by a large number of
governments, supra-national institutions and central banks around the world.
Aims
The aim of this project is twofold: a) to compare the effects of proposed parties’
programs on Italy’s economy; b) to introduce an element of “Accountability” in
the political environment, as it will establish a point of reference against which to
check the future behaviour of parties in Parliament with the measures they
declared they wanted to implement. The exercise proposed by Corriere della
Sera is new and innovative in the Italian economic environment. It draws
inspiration from another similar exercise produced for about 30 years by CPB
(Central Planning Bureau) in the Netherlands.
Study design
A questionnaire including 20 questions was sent to the four parties that accepted
the invitation to participate to this exercise: “Fare per Fermare il Declino”,
“Partito Democratico”, “Popolo della Libertà” and “Scelta Civica – Con Monti per
l’Italia”. The questions focused on the key policies that would be implemented by
each party after winning the election. The answers provided by the parties have
been converted into quantitative inputs for the Oxford Economic Global Model.
Oxford Economics’ most recent forecasts for Italy (within the global economic
context) have been used as a baseline for the simulations.
Results
The simulations run by Oxford Economics provide an accurate and unbiased
estimate of the economic impact of the party programs. In particular, the impact
of policies has been assessed and summarised in terms of GDP, unemployment
rate, household disposable income, CPI inflation, budget deficit and public debt.
Oxford Economics assumed a successful implementation of the policies of each
party, despite the fact that implementation appears dependent on the political
strength of the upcoming government. The simulations showed the strengths
and weaknesses of each party’s program.
The current situation of the Italian economy does not leave room for parties to
propose radically different programmes. The path for improving growth (and
4
potential output) within the constraints imposed by the need to bring the huge
debt to GDP ratio under control is rather narrow. However, parties proposed
programs incorporating significant differences both in the measures and in the
timing of their implementation. Major differences can indeed be found in the
overall size of their intervention on taxes and expenditures, as well as in the size
of their reliance on the sale of public assets (which they all plan for). They also
differ in their vision to prioritise different measures and sectors of the economy
(private and/or public investment, employment and labour market, workers’
incomes, subsidies, training, innovation, etc.).
Some similarities nonetheless appear: none of the four parties indicated that
Italy should leave the Euro nor that the Fiscal Compact should be renegotiated.
All parties chose the reform of the tax system as well as the revision of central
government expenditure as priorities for their activity in the next legislature. All
party programs intend to fund tax cuts with expenditure cuts, although they vary
in size.
There are however, some risks that some of the individual measures included in
the programs will not yield the amounts expected by the party. The largest of
such risks is for the revenues expected from privatisation in the PdL program.
Party programs positively impact in varying degrees on GDP, unemployment,
household income and debt. The program of “Popolo della Libertà” results in
larger increases in GDP and employment, although at the expense of the public
deficit. The party programs which contain more prudent fiscal budgets and are
more oriented towards reducing taxes to households result in faster fiscal
consolidation. To the extent that they rely less on uncertain revenues from asset
sales, the financing of these programs is also more secure. This is the case for
the programs of “Partito Democratico” and “Scelta Civica – Con Monti per l’Italia”
while “Fare per Fermare il Declino” appears to be in an intermediate position.
5
1 Introduction
The election which will be held in Italy in February 2013 is likely to shape the
prospects of the Italian economy for many years to come. Rising unemployment,
high public debt and low competitiveness are only some of the challenges that
the new government will face.
The competing parties proposed different sets of policies to boost growth and
employment while maintaining the process of fiscal consolidation on track.
Corriere della Sera (CdS), one of the most prominent newspapers in Italy,
wanted to test the economic impact of the proposed measures with the help of
an independent economic consulting company. Oxford Economics (OE) used its
Global Economic Model to quantify the impact of proposed policies on the
economy. The aim of CdS is twofold: a) to compare the effects of proposed
parties’ programs on the country’s economy; b) to introduce an element of
“Accountability” in the political environment, as it will allow to check the future
behaviour of parties in Parliament against the measures they declared they
wanted to implement.
The exercise proposed by CdS is new and innovative in the Italian economic
environment. It draws inspiration from another similar exercise produced for
about 30 years by CPB (Central Planning Bureau) in the Netherlands.
This study presents the results of the analysis carried out by OE on behalf of
CdS. The work phases, which involved a constant cooperation between the two
companies, were:
Invitations and questionnaires: a questionnaire including 20 questions
was sent to the four parties that accepted the CdS’s invitation to
participate to this exercise:
o “Fare per Fermare il Declino” (Fare)
o “Partito Democratico” (PD)
o “Popolo della Libertà” (PdL)
o “Scelta Civica – Con Monti per l’Italia” (SC)
The questions focused on the key policies that would be implemented
by each party after winning the election and have been published by
CdS on 18 January, seeking quantified answers about the size of the
proposed policies. The questions are publicly available on the CdS
website and can be grouped into:
Definition of priorities
Tax measures
Public expenditure measures
Eurozone policies
Data collection and meetings: All parties provided answers to all 20
questions, with a varying degree of detail about the size of the measures
mentioned in the program. Whenever OE believed the information
provided was not sufficient or not clear, it contacted the parties to obtain
a clarification or a correction.
6
Simulation: The answers provided by the parties have been converted
into quantitative inputs for the OE model. In particular, OE did not make
any assumption regarding the values used in the simulations – except
for PD, which only supplied limited data. Solving the model with these
inputs provides quantitative estimates of the parties’ programs on the
Italian economy. Details on the methodology are provided in section 3.
Analysis of the results: The impact of policies is assessed in terms of
GDP, unemployment rate, household disposable income, CPI inflation,
budget deficit and public debt – and described in this report.
Report: OE prepared a report for CdS summarising the key policies
implemented in the model for each party, the methodology used for the
simulations and the results.
The OE Global Economic Model (GEM) was used for the simulation of the
parties’ programs. The GEM includes detailed models for 46 countries and
headline models for 33 countries aggregated in 6 trading blocks to account for
the rest of the world. In particular, the Italian econometric model is very detailed,
with more than 600 variables. Being part of the OE Global Model, simulations on
the Italian model include feedback effects from the rest of the world. For
example, a rise in growth of the Italian economy would have a positive impact on
Italy’s trading partners, which in turn would further improve economic conditions
in Italy. Further details on the model can be found on
www.oxfordeconomics.com.
For further information on Oxford Economics and its GEM, please contact Emilio
Rossi at erossi@oxfordeconomics.com or Fabio Ortolani at
fortolani@oxfordeconomics.com.
The layout of the rest of the study is as follows. Section 2 describes the parties’
programs, with a focus on the key policies that are expected to have a more
significant impact on the Italian economy in the simulation. Section 3 describes
in detail the methodology adopted for implementing the policies in the Italian
econometric model, the assumptions used and the simulation results. Section 4
concludes.
7
2 Measures proposed by the Italian parties
This section introduces our analysis of the parties’ economic programs. As
mentioned in the previous section, the key policies for each party have been
extrapolated from the answers to the questionnaires and successive meetings
with party representatives. OE did not make any assumption regarding the
values used in the simulations – the figures mentioned in this section reflect the
information made available by parties to OE at the time the simulations were
run. OE made assumptions on the size of the fiscal measures in the case of the
PD policies, complementing the information contained in the answers to the
questionnaires with figures from newspaper articles and other sources.
Only the policies relevant for the simulations are discussed in this section, as
parties’ answers have already been published by CdS on their website in
exhaustive articles over the period ahead of the election. Sections 2.1 to 2.4 are
devoted to the description of the key fiscal policies proposed by “Fare per
Fermare il Declino”, “Partito Democratico”, “Popolo della Libertà” and “Scelta
Civica – Con Monti per l’Italia” respectively. While Rivoluzione Civile did not
supply CdS with enough information to extrapolate a fully comprehensive
economic policy program, Movimento 5 Stelle (M5S) made reference to its
program as published on their website. Also in this latter case, the information
available was not sufficient to quantify the M5S economic measures.
2.1 Fare per Fermare il Declino
The three key priorities indicated by “Fare per Fermare il declino” are: raising
GDP growth, revising central government expenditure and reforming the tax
system. In particular, Fare aims to reduce the fiscal burden by 5% points of GDP
in five years through several specific measures. Firstly, companies would
experience a reduction of taxation as the regional corporate tax – Irap – would
be gradually abolished. Additional €11 billion of savings for companies would
result from a reduction of social contributions in the second half of the
legislature. Meanwhile, households would experience a reduction of both direct
and indirect taxes. The income tax would be reduced, with the tax rate on the
poorest half of households cut to zero. As a result, income tax revenues are
expected to shrink by 20% at the end of the legislature. Moreover, the VAT tax
hike from 21% to 22% expected in July 2012 would be avoided.
Fare aims to reduce total government expenditure by 6% of GDP in five years.
1% point would derive from lower interest payments, as the party expects to cut
government debt by €200 billion by the end of the legislature by selling public
assets from 2014. The residual adjustment (5% of GDP in 2017) would result
from a broad set of measures, to be implemented progressively. In particular, a
further revision of the pension system would generate savings for €35 billion at
the end of the legislature. Government subsidies would be slashed in the first
two years of the legislature. The residual adjustment would come from a
reduction of administrative costs.
Fare proposes measures against unemployment and aimed at improving
professional training in the second half of the legislature. Meanwhile, public
investment growth would be maintained in line with GDP growth.
8
2.2 Partito Democratico
The “Partito Democratico” (PD) has listed a number of targets for the next
legislature, not restricting the choice to three key targets as proposed in the OE
questionnaire, e.g. increase GDP growth, improve the competitiveness of the
Italian economy, increase employment, reduce tax evasion and reform the tax
system. The PD has not provided a full quantitative analysis of its proposed
measures. As a result, OE has integrated the information available from the
party’s answers with available figures from newspaper articles and other
sources.
The PD aims to reduce taxation on households by cutting the lowest income tax
rate to 20% from 23%, as part of an overall package worth approximately €30
billion. The income tax measure is estimated to cost €12bn. Moreover, a re-
modulation of the property tax would imply a reduction of the tax on poorer
households at the expense of richer households. As the measure is expected to
be at zero cost for the state, OE has not changed the overall revenues
generated by the property tax. Finally, the VAT hike from 21% to 22% in July
2013 would be avoided while the VAT tax on excise taxes on fuel would be
“sterilised”. Meanwhile, companies would see taxes reduced through an
increase of deductions on taxes on reinvested earnings.
Lower revenues from tax cuts would be covered by lower government
expenditure and reinforcing the fight to tax evasion. The former has been split
equally between lower transfers and lower government consumption, while
fighting tax evasion is assumed to bring in additional revenues for €6 billion in
2017. OE also added a prudent estimate of the public debt cut achieved through
sales of public assets in order to make the simulation consistent with those of
the other parties. In particular, the cut is expected to start in 2014 and amount to
€80 billion in 2017.
2.3 Popolo della Libertà
The “Popolo della Libertà” (PdL) party’s three priorities are to increase GDP
growth, revise central government expenditure and reform the tax system. The
targets would be reached by reducing the fiscal burden by 5% points in 2017. In
particular, the fiscal burden would be reduced by 1 percentage point per year
split equally between firms and households. A fiscal reform would reduce the
current income tax brackets and rates to two – a rate of 23% on income up to
€43,000 and 33% on income above €43,000. Revenues from income taxes are
expected to drop €22 billion as a result. The PdL would also eliminate the
property tax (IMU) on first residences and return the IMU paid on first residences
in 2012 to households. Finally, households would not experience a rise in the
VAT rise from 21% to 22% in July 2012. Companies would also experience a
decline of taxation. In particular, the PdL would gradually abolish the regional
corporate tax – Irap. The cost of this measure is estimated by the PdL at €34
billion. The fiscal wedge would be reduced by cutting contributions for a total of
€12 billion by 2018.
The reduction of taxes would be accompanied by savings on the expenditure
side and additional revenues from fighting tax evasion. In particular, government
expenditure would be cut through a reorganization of tax expenditures
9
(deductions, exemptions, etc.) which would result in savings for €30 billion in
2018. Reinforcing the fight to tax evasion would generate additional revenues for
€10 billion between 2013 and 2018. The remaining savings are expected to
come from a reduction of interest payments due to a significant cut of
government debt. In particular, fiscal agreements with Switzerland and the sale
of public assets are expected to allow debt to be cut by €400 billion in 2018. The
fiscal agreement with Switzerland is expected to bring in revenues for €40 billion
in 2013-2014, and €5bn per year thereafter, which would be partly used to
expand investment during the legislature.
The sale of €400bn of public assets is a key point of the PdL program, since it is
from this measure and its positive impact on financial markets that PdL expects
a reduction in interest rates by 1% per year, or €16bn of resources per year to
be devoted to tax cuts. It is to be noted that the disposal of €400bn appears to
be technically very difficult to achieve within the five years of the legislature. In
the seventeen year period 1994-2010 (which included many years of more
optimistic financial markets than today), Italy managed to dispose off public
assets by less than €100bn, according to a paper released by the Ministry of
Economy and Finance in 2010. Moreover, the PdL program outlines that about
€230-240bn (about two thirds of the total €400bn) will be obtained by
establishing a new financial company charged with selling specific public assets.
Whether this financial company would be considered within or outside the
perimeter of government debt (and therefore whether it would abate Italian debt
or not) would be subject of scrutiny and of possible unfavourable decision by
Eurostat while financial markets’ reaction would have to be verified.
2.4 Scelta Civica – Con Monti per l’Italia
The main targets of the party “Scelta Civica – Con Monti per l’Italia” (SC) are to
increase employment, revise central government expenditure and reform the tax
system. In particular, SC aims to reduce the fiscal burden by 3% points in 2017
through various measures affecting both households and companies. The
former would experience a reduction of income taxes of 2% points of GDP by
2017. Moreover, tax deductions on the property tax – IMU – would be increased
by up to €2.5 billion by 2017. Companies would also experience a lower level of
taxation by the end of the legislature. In particular, corporate taxes would be
reduced by almost 1% of GDP in 2017, according to SC plans. Moreover, the
party aims to boost private investment by introducing tax deductions for
innovative companies. This measure is expected to add 0.1% point to the
reduction of corporate tax revenues as percentage of GDP.
Government expenditure (excluding interest payments) as percentage of GDP
would be cut by 4 percentage points in 2017. Half of the adjustment in
government consumption is expected to take place through a reduction of
prices, although this will also generate lower revenues for companies providing
goods and services to the public sector. Meanwhile, additional efforts to fight tax
evasion will add €360 million of revenues in 2013 – with the annual increment
seen rising to €445mn in 2017. Finally, SC expects to cut government debt by
€130 billion by the end of the legislature through the sale of public assets
SC also aims to increase the ratio of public investment to GDP by 0.8
percentage points by 2017, in order to boost growth and employment.
10
2.5 Similarities between the proposed measures
The party programs have many differences, but also share some similarities. In
particular, all parties expect a significant reduction of public debt from asset
sales, albeit of very different size. The PdL expects the larger debt cut which, at
€400 billion, would bring public debt below 100% of GDP at the end of the
legislature. On the expenditure side, this implies a reduction of interest
payments, with more resources available for fiscal stimulus.
Another similarity can be found where both SC and PdL explicitly mention
increasing government investment to boost employment and output. Fare
stressed resources will be allocated to protect unemployed people and improve
professional training. On the revenues side, Fare, PD and PdL propose the
cancellation of the VAT hike in July 2013 as a measure to stimulate consumer
spending through a lower level of prices.
Moreover, all parties are willing to reduce the weight of the property tax on
poorer households, either by eliminating the tax on primary residences – as in
the PdL programm – or by planning tax deductions or a re-modulation of the tax.
Finally, most parties – with the exception of the PD – want to reduce taxations
on firms, with both the PdL and Fare aiming to abolish the Irap regional business
tax.
These similarities show some agreement among the parties on which policies
would be necessary to support the recovery of the Italian economy in the coming
quarters.
11
3 Simulation results
This section summarises the simulation results obtained by implementing the
party policies in the OE Global Economic Model (GEM). The main objective of
the analysis is the comparison across parties’ programs of their impact on the
Italian economy over a medium-term time horizon. Section 3.1 summarises the
key features of the macroeconomic model for Italy and in particular how fiscal
policy measures affect the economy. Section 3.2 describes the variables and
tables used to summarise the output and the OE baseline forecast. Section 3.3
illustrates the results and compares the outcome of the different simulations.
3.1 Input variables and OE assumptions
OE’s GEM includes a detailed model of the Italian economy. In particular, fiscal
variables such as government current spending or income tax feed through the
rest of the economy. Their level therefore determines the economic environment
as reflected in GDP growth, employment or inflation. For instance, a reduction in
income tax rates has an immediate positive effect on households’ disposable
income. In turn, this boosts private consumption, which leads to higher
employment. If not matched by increased supply, increased demand in the
economy raises inflationary pressures. Moreover, a rise in consumption also
raises demand for foreign goods. The rise in imports leads to a worsening of the
external balance. Another example relates to taxes on labour. A reduction in
employers’ social security contributions lowers the cost of labour, which
encourages firms to hire. Higher employment boosts incomes and consumption
and economic activity in general.
12
The key fiscal levers that have been used to quantify the impact of the parties’
proposals are the following:
On the revenue side, the main variables are: direct and indirect taxes,
employee social security contribution, corporate tax and payroll tax.
On the expenditure side, the main variables are: government
consumption and investment and government transfers.
OE revises its forecasts on a monthly basis. The January 2013 forecast was
used as a baseline for the simulations of parties’ programs (henceforth “the
baseline”). According to OE assumptions, world GDP growth rises slightly from
2.3% in 2013 to 2.4% in 2014, with a pick up in the medium term to 3.5% pa
between 2015 and 2018. GDP growth in the US also accelerates from 2.3% in
2013 to just above 3% in 2014 and remains close to 3% in the medium term.
Growth in the Eurozone as a whole is negative in 2013, at -0.2%, but a gradual
turnaround from 2013H2 results in growth rising to 1.1% in 2014. Tight fiscal and
credit conditions, high unemployment and private sector deleveraging keep GDP
growth in the Eurozone well below the US in the medium term, at around 1.5%
pa between 2015 and 2018.
The Italian economy underperforms the rest of the Eurozone, with GDP falling
1.2% in 2013 and rising a modest 0.3% in 2014%. Medium-term growth remains
at 1.2% pa on average in 2015-2018. GDP drops in the short term as domestic
demand is depressed by fiscal austerity and tight credit conditions. Moreover,
consumption is held back by high unemployment, which is expected to continue
to rise until 2014, when it peaks at 12.6%. Fiscal consolidation implies the
budget deficit is seen falling steadily in the next years. As a result, public debt
starts to decline from 2015.
When running the simulations, OE assumed that the European Central Bank
does not respond to the fiscal policies in Italy in order to make the results
independent of possible changes in the monetary policy. Similarly, the euro
exchange rate has been kept exogenous, in order to reflect only domestic
sources of changes in competitiveness.
Oxford Economics assumed all policies would be implemented successfully and
as reported by the parties in their programs. Risks related to the technical
implementation of the measures and other problems are highlighted in the
section 3.2 and 3.2.
3.2 Measures of the economic impact
The results have been summarised using the key economic metrics identified by
CdS. This set of variables best summarises the impact of the policies on
households, firms and public finances. Table 3.1 shows the level of the variables
under the different policy assumptions. The values are computed starting from
the OE forecast for Italy and the differences result from the impact of the policy
measures described in section 2. In particular, table 3.2 shows the same list of
indicators expressed as differences from the OE forecast. Depending on the
variable, the difference is expressed in percentage terms or levels, as explained
in more detail in the next paragraph.
13
The variables are:
Real GDP: gross domestic product (GDP) is a measure of the economic
activity in the country. In particular, nominal GDP measures the value of
all of goods and services produced by the economy. The impact of
changes in prices is eliminated when estimating the real GDP. The
figure in Table 3.1 shows the growth rate of real GDP while table 3.2
measures the percentage difference of the variable with respect to the
OE forecast in each simulation.
Unemployment rate: the variable measures the number of people of
working age that is not employed but is actively looking for a job as a
percentage of the workforce. A high level of the unemployment rate
implies that more people fail to find a job as the economic activity is
shrinking or depressed. The value in table 3.1 shows the level of the
unemployment rate while the value in table 3.2 measures the difference
between the rate under the various programs and the baseline in
percentage points.
Household income: household income comes mainly from wages,
salaries, interest receipts and government transfers. Disposable income
is obtained subtracting taxes from total household income, while real
disposable income is computed by eliminating the effect of changes in
prices. Real household disposable income measures the resources
available to households for consumption. The figure for household
income in table 3.1 is the growth rate of real household disposable
income while table 3.2 shows the percentage difference from baseline.
CPI inflation: inflation describes the phenomenon of rising prices within
an economy. In particular, CPI inflation measures the change in prices
of consumer goods. A strong rise in inflation reduces households’
purchasing power and depresses consumption. An increase in the VAT
rate has a direct impact on consumer good prices and inflation. The
figure in table 3.1 shows the inflation rate in each of the simulations
while table 3.2 shows the percentage change in the level of the
consumer price index with respect to the OE forecast.
Government balance: a government budget deficit occurs in any year
when government revenues are lower than expenditures. A larger deficit
implies a faster accumulation of debt, often accompanied by higher
interest rates paid by the government to refinance its debt. This, in turn,
affects the interest rates at which companies and households can
borrow, with a negative impact on consumption and investment. The
value in table 3.1 shows the deficit of the Italian general government
expressed as percentage of GDP while the figure in table 3.2 measures
the difference of the deficit under the various programs and the baseline
expressed as percentage of GDP.
Government debt: government debt measures the outstanding
borrowing of the public sector and results from the accumulation of past
deficits. A high level of debt – Italy is second only to Greece in the
Eurozone – implies large interest payments, which reduce available
resources for government consumption and investment. Moreover, it
increases the perceived risk of default of the government, which is
14
reflected in the risk premium on government bond yields. The figure in
table 3.1 shows the level of public debt expressed as percentage of
GDP while table 3.2 measures the difference of debt under the various
programs and the OE forecast expressed as percentage of GDP.
3.3 Results and comparison
This section aims at providing an explanation of the economic impact of the
different party programs shown in tables 3.1 and 3.2 in the Appendix and a
comparison of the results, highlighting possible strengths and weaknesses in the
policy assumptions.
The key results for each party are:
Fare per Fermare il Declino: Fare’s program results in a significant
improvement in GDP in the medium term. In particular, GDP is up by
1.1% (€16bn at today’s prices) with respect to OE’s forecast in 2018.
The cuts in taxes on companies boost production and allow
unemployment to drop by 0.8% points in 2018. This, together with lower
taxes on income, supports household disposable income and
consumption. Moreover, the abolition of the planned VAT hike in July
2013 reduces price level around 3.5% lower than baseline in 2018 – the
OE baseline assumes that the VAT hike occurs. The government deficit
widens slightly as a result of the cuts in taxes, although the impact of the
measures on public finances is mitigated by the rise in economic activity
that generates extra revenues and lowers social spending needs. By
2018, the deficit is 0.2% point wider than in the baseline. Finally, public
debt as percentage of GDP drops 8.6% points due to revenues from
sales of public assets.
Partito democratico: With little quantitative detail provided by PD, OE
had to quantify most of their answers. The simulation captures the key
implications of the size and the distribution of the fiscal package
proposed by the PD. Firstly, the policies appear to have a positive
impact on GDP in the medium term, as the level of output is 0.4% (€6bn
at today’s prices) higher in the simulation than in the baseline in 2018.
However, the rise in GDP is not sufficient to trigger a significant
reduction of unemployment, which is down only 0.1 percentage point
compared with the OE forecast in 2018. Disposable income rises almost
1% with respect to baseline as a result of the planned income tax rate
cut from 23% to 20%. Moreover, as the planned VAT hike is cancelled,
the level of consumer prices is 1.9% below baseline by 2018. The
balanced budget nature of the measures combined with somewhat
higher economic activity means that the government deficit improves
slightly, by 0.2 percentage points of GDP below the baseline in 2018.
Debt falls by 3.5 percentage points of GDP under the PD program, from
asset sales.
Popolo della Libertà: The PdL program has a very positive impact on
GDP. In particular, the initial boost to GDP is stronger than in the other
simulations as a result of the large stimulus package, which is funded by
a one-off fiscal arrangement with Switzerland. GDP is 1.8% (€26bn at
15
today’s prices) above baseline in 2018, while unemployment falls 1.5
percentage points with respect to the OE forecast, i.e. more than in all
other simulations. Household disposable income rises by less than in
Fare and Monti simulations – by 1.5% with respect to baseline in 2018 –
as the reduction in income taxes is relatively smaller. Moreover, GDP
growth falls below baseline in 2018, at 1.2%, partly because of fading
effects from higher investment. The fiscal balance deteriorates
compared to the OE baseline. In particular, the government deficit
begins to widen in 2015, rising above 3% of GDP again in 2016. As a
result, debt remains above 100% of GDP in 2018.
Scelta Civica – Con Monti per l’Italia: SC’s program results in a lower
increase in GDP in the long term than in the Fare and the PdL
simulations. Indeed, the cuts in government consumption imply a slight
deterioration of GDP in 2013-2014. However, GDP accelerates from
2015 and is 0.8% (€12bn at today’s prices) above baseline in 2018. As a
result, unemployment drops 0.3 points below baseline in 2018. The
significant reduction of the income tax results in a 2.2% rise of real
household income with respect to baseline. Prices fall less than under
any other program because of the VAT hike in 2013 – which is also
assumed in the OE baseline. The government deficit improves from
2013 and narrows by 0.5% of GDP in 2018. This, combined with
revenues from sales of public assets, reduces public debt by almost 9%
of GDP in 2018.
The differences between the simulation results derive from the different size and
composition of the fiscal packages proposed by the parties. In particular, real
GDP is directly affected by changes in government consumption and
investment. Moreover, employment is positively affected by the level of
economic activity and changes to payroll taxes and social security contributions
that affect the cost of and hence demand for labour. Finally, the dynamics of
fiscal deficit and public debt depend on the balance between the proposed cuts
in revenues and expenditures, as well as interest rates. Overall, all simulations
resulted in a positive impact of the measures on GDP. As already pointed out,
OE assumed the party programs would be implemented successfully when
running the simulations. On the contrary, the OE baseline forecast reflects more
prudent assumptions, which results in a more negative outlook for the Italian
economy in the next few years.
We summarise the key differences in their economic impacts in the next
paragraphs:
Household consumption depends on disposable income, which in turn is
affected by wages, employment, income tax rates, government transfers
and inflation. As a result, the party programs that reduce indirect (VAT)
or direct taxation on households’ disposable incomes by more and
cut government transfers by less will have a more positive impact on
households’ purchasing power and spending. This is the case for the
Fare and SC programs, for which the net reduction in direct taxes
compared to the OE baseline is estimated at around 2% of GDP in
2018. Moreover, the fact that the Fare program exclude a VAT hike,
accounts for the fact that households’ incomes rise more strongly
(+2.9% in 2018) than under the SC program (+2.2%). The absence of a
16
VAT hike in 2013 also contributes to the relatively large increase in
household income in the PD simulation in spite of the smallest reduction
in income taxes – estimated at less than 1% of GDP in 2018.
The stimulus provided to firms is essential for the economy, as it
supports production and employment. As a result, cuts to corporate
taxes and measures aimed at reducing the cost of labour have a
significant impact on growth. The PdL proposed significant cuts to
corporate taxes, estimated at around 1.5% of GDP - net of other
measures – in 2018. It also proposes a reduction of the tax wedge,
which contributes to an increase in potential output. These measures
allow unemployment to fall the most in the PdL simulation and output to
rise significantly. The Fare program also contains a reduction of
corporate taxes and the tax wedge, which result in significantly lower
unemployment with respect to baseline. SC and PD measures are
smaller in size and their impact on unemployment and GDP growth is
reduced as a result.
Similarly, the stimulus from higher government investment has a
positive impact on growth. Typically, a rise in government investment
worth 1% of GDP will raise overall GDP by slightly more than 1%. The
SC’s program aims to rise government investment by 0.8% point of GDP
by 2018. This explains higher GDP in the SC simulation compared to
PD – OE assumed government investment remains at the baseline level
in the PD simulation.
Competitiveness gains can result from a reduction of taxation on
wages and the drop in prices that follows a reduction of the VAT rate.
The results show that the party programs that are more focused on cuts
to corporate taxes, the tax wedge and VAT boost competitiveness the
most. In particular, we find that the improvement in competitiveness is
accounts for most of the additional positive impact on GDP of the PdL
program compared to the SC program, while without this
competitiveness channel the impact of the Fare program drops
somewhat below that of the SC program.
Government consumption is one of the components of GDP. As a
result, cuts to government consumption have an immediate impact on
GDP and programs that have larger expenditure cuts show a lower
relative level of output. SC cuts to government consumption are
estimated at around 1.5% of GDP in 2018 – net of other measures. Fare
also has similar – but slightly smaller – cuts in government consumption,
while OE estimated cuts of less than 1% of GDP in 2018 in the PD
program. The PdL does not mention explicitly reducing government
consumption in its program. Cuts to government expenditure contribute
to explain the differences in the level of output in the medium term, with
GDP in the SC and Fare simulations remaining below the level attained
under the PdL program until 2018.
Fiscal sustainability is key for any fiscal package, as it determines the
dynamics of fiscal balances that are closely watched by foreign
institutions and investors. Unsustainable programs are likely to lead to
sharp increases in bond yields which raise the cost of debt and threaten
the ability by the government to continue with the planned program. The
17
results show wide differences between the party programs. In particular,
the PD and SC programs appear more balanced, with government
balance improving with respect to the baseline. On the contrary, the
Fare program results in a slight deterioration of the budget deficit in the
medium term. The difference is explained by the fact that the relative
reduction of expenditures in the Fare program (6 percentage points of
GDP compared to a 5 percentage points drop in revenues) is smaller
than in the SC program (4 percentage points of GDP compared to a 3
percentage points drop in revenues). Moreover, the larger drop in prices
implied by the Fare program affects nominal revenues from the
consumption tax. The PdL program results in a significant deterioration
of the government balance, in spite of the marked increase of GDP. The
party expects a significant drop in interest rates from the large cut of
government debt to below 100% of GDP (ex-ante) in 2018. Problems
related to the feasibility of such a large cut in debt have been pointed
out in section 2.3. These problems could raise investors’ concerns about
the sustainability of Italian debt and result in higher interest rates. We
find that bond yields are unlikely to fall by as much as assumed in the
program. Moreover, the €30 billion reduction in “tax expenditures”
(transfers, subsidies, etc.) is not sufficient to offset the effect of lower
revenues. As a result, the government deficit rises above 3% of GDP in
2016 and government debt fails to drop below 100% of GDP. GDP
growth also begins to suffer in the medium term, falling below baseline
in 2018.
Asset sales – Reduction in government debt are to be achieved partly
from the sale of public assets. The PdL, and to a (much) lesser extent
the Fare, programs are particularly reliant on this. Whilst privatisations
or more general sale of assets can indeed bring additional revenues
quickly and make economic sense if a company or sector would be
better run in the private sector, how much revenue can be generated
from such sales is uncertain. Buyers may not be found or they may not
be willing to offer the prices assumed in the party programs. If revenues
from asset sales cannot be generated to the extent assumed in the
programs, the sustainability of these programs would be jeopardised.
The simulations showed that each party program has its own strengths and
weaknesses. More pro-growth and pro-businesses programs are expected to
bring a larger increase in output and employment. On the contrary, smaller and
more austere programs are expected to result in a smaller positive impact on
GDP but also faster fiscal consolidation.
18
4 Conclusions
The aim of this exercise was to compare the effects of proposed parties’
programs on the Italian economy ahead of the February elections. Oxford
Economics ran simulations of the party programs on behalf of Corriere della
Sera using its well-known Global Economic Model. Oxford Economics’ forecasts
have been used as a baseline for the simulations.
The impact of policies has been assessed in terms of GDP, unemployment rate,
household disposable income, CPI inflation, budget deficit and public debt. The
report described the transmission mechanism that led to the results observed in
the simulations for the key economic variables and identified strengths and
weaknesses of the each party program.
The party programs that are more oriented towards supporting businesses and
investment have a stronger positive impact on the level of output of the economy
and employment, although at the expense of the public deficit. This was the
case for the programs of “Popolo della Libertà” (with the caveat related to
privatisation revenues), and to a lesser extent of “Fare per Fermare il Declino”
(whose public deficit remained in line with the OE baseline).
The party programs which contain more prudent fiscal budgets and are more
oriented towards reducing taxes to households result in a faster fiscal
consolidation. To the extent that they rely less on uncertain revenues from asset
sales, the financing of these programs is also more secure. This was the case
for the programs of “Partito Democratico” and “Scelta Civica – Con Monti per
l’Italia”.
The report also described some of the risks that could interfere with the
implementation of the programs.
19
Appendix
2013 2014 2015 2016 2017 2018Fare per Fermare il Declino
Real GDP - % change -1.1 0.4 1.0 1.5 1.5 1.9
Unemployment rate - % 12.5 12.6 12.1 11.5 10.7 9.9
Household income - % change -3.2 0.4 0.7 1.6 2.2 2.3
CPI Inflation - % change 2.2 1.2 0.8 0.7 0.4 0.3
Government balance - % of GDP -2.3 -1.7 -1.8 -2.0 -1.5 -1.5
Government debt - % of GDP 126.4 125.6 122.0 118.1 115.2 112.4
Partito Democratico
Real GDP - % change -1.4 0.4 1.1 1.4 1.4 1.4
Unemployment rate - % 12.6 12.7 12.2 11.7 11.1 10.6
Household income - % change -3.5 0.5 0.9 1.0 1.5 1.5
CPI Inflation - % change 2.1 1.1 0.8 0.9 1.1 1.3
Government balance - % of GDP -2.2 -1.9 -1.8 -1.5 -1.3 -1.1
Government debt - % of GDP 126.5 126.0 124.3 121.9 119.2 117.4
Popolo della Libertà
Real GDP - % change -0.8 0.6 1.4 1.7 1.7 1.2
Unemployment rate - % 12.4 12.2 11.4 10.6 9.9 9.2
Household income - % change -2.6 -0.5 1.2 1.6 1.6 0.8
CPI Inflation - % change 2.1 1.0 0.5 0.7 1.0 1.4
Government balance - % of GDP -2.7 -1.7 -2.4 -3.2 -3.4 -3.0
Government debt - % of GDP 125.2 120.4 114.4 108.7 103.4 104.1
Scelta Civica - Con Monti per l'Italia
Real GDP - % change -1.4 0.4 1.3 1.4 1.6 1.5
Unemployment rate - % 12.6 12.7 12.2 11.6 11.0 10.4
Household income - % change -3.7 0.3 1.5 1.6 2.0 1.5
CPI Inflation - % change 2.3 1.7 0.9 1.0 1.1 1.2
Government balance - % of GDP -1.9 -1.7 -1.5 -1.4 -1.1 -0.8
Government debt - % of GDP 125.7 124.7 121.5 118.0 114.2 112.1
Table 3.1: simulation results
(growth rates and levels)
20
2013 2014 2015 2016 2017 2018Fare per Fermare il Declino
Real GDP - % difference 0.1 0.1 0.0 0.3 0.5 1.1
Unemployment rate - level difference 0.0 -0.1 -0.1 -0.2 -0.5 -0.8
Household income - % difference 0.3 0.7 0.5 1.2 2.1 2.9
CPI Inflation - % difference -0.2 -0.7 -1.0 -1.6 -2.5 -3.6
Government balance* - level difference -0.1 0.2 0.0 -0.4 0.0 -0.2
Government debt - level difference 0.0 -1.3 -4.0 -6.5 -7.7 -8.6
Partito Democratico
Real GDP - % difference -0.2 -0.1 0.0 0.1 0.3 0.4
Unemployment rate - level difference 0.1 0.1 0.0 0.0 -0.1 -0.1
Household income - % difference -0.1 0.5 0.6 0.7 0.9 0.9
CPI Inflation - % difference -0.2 -0.9 -1.2 -1.5 -1.7 -1.9
Government balance* - level difference -0.1 0.0 0.0 0.1 0.1 0.2
Government debt - level difference 0.1 -0.9 -1.7 -2.7 -3.7 -3.6
Popolo della Libertà
Real GDP - % difference 0.3 0.6 1.0 1.5 1.9 1.8
Unemployment rate - level difference -0.1 -0.5 -0.8 -1.1 -1.3 -1.5
Household income - % difference 0.9 0.4 0.7 1.5 1.8 1.1
CPI Inflation - % difference -0.2 -0.9 -1.5 -2.1 -2.5 -2.5
Government balance* - level difference -0.5 0.2 -0.6 -1.6 -2.0 -1.7
Government debt - level difference -1.2 -6.5 -11.6 -15.9 -19.5 -17.0
Scelta Civica - Con Monti per l'Italia
Real GDP - % difference -0.2 -0.1 0.2 0.4 0.6 0.8
Unemployment rate - level difference 0.1 0.1 0.0 -0.1 -0.2 -0.3
Household income - % difference -0.2 0.1 0.8 1.5 2.2 2.2
CPI Inflation - % difference 0.0 -0.1 -0.3 -0.5 -0.7 -0.9
Government balance* - level difference 0.3 0.2 0.3 0.3 0.4 0.5
Government debt - level difference -0.6 -2.2 -4.5 -6.6 -8.7 -8.9
* A positive number implies an improvement of the government balance
Table 3.2: impact of policies
(differences with respect to baseline)
21
7
8
9
10
11
12
13
14
15
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fare
PD
PdL
SC
Italy: unemployment rate%
Source : Oxford Economics
-5
-4
-3
-2
-1
0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fare
PD
PdL
SC
Italy: government balance% of GDP
Source : Oxford Economics
1375
1390
1405
1420
1435
1450
1465
1480
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fare
PD
PdL
SC
Italy: real GDP€ billion - 2005 prices
Source : Oxford Economics
100
105
110
115
120
125
130
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fare
PD
PdL
SC
Italy: government debt% of GDP
Source : Oxford Economics
22
OXFORD
Abbey House, 121 St Aldates
Oxford, OX1 1HB, UK
Tel: +44 1865 268900
LONDON
Broadwall House, 21 Broadwall
London, SE1 9PL, UK
Tel: +44 207 803 1400
BELFAST
Lagan House, Sackville Street
Lisburn, BT27 4AB, UK
Tel: +44 28 9266 0669
NEW YORK
817 Broadway, 10th Floor
New York, NY 10003, USA
Tel: +1 646 786 1863
PHILADELPHIA
303 Lancaster Avenue, Suite 1b
Wayne PA 19087, USA
Tel: +1 610 995 9600
SINGAPORE
No.1 North Bridge Road
High Street Centre #22-07
Singapore 179094
Tel: +65 6338 1235
PARIS
9 rue Huysmans
75006 Paris, France
Tel: + 33 6 79 900 846
MILAN
Via Cadorna 3,
20080 Albairate
Tel: + 39 320 4525 559
www.oxfordeconomics.com
Recommended