Thu, Oct 11, 2018 - Page 9 News List

Italy’s new populism
is not new at all

Increasing spending is the only way the ruling coalition can deliver on its grand campaign promises, leaving the nation in an even worse fiscal position

By Paola Subacchi

Illustration: Mountain People

The Italian coalition government, comprising the anti-establishment Five Star Movement (M5S) and the far-right League party, made headlines recently for its new draft budget, which violates EU rules.

However, this hardly the first Italian government to make over-the-top promises and squander public money to pay for them. When all is said and done, Italy’s new populism is not new at all.

The government’s proposed budget promises to increase borrowing to finance a deficit of 2.4 percent of GDP next year and the following two years.

While this would not cross the EU’s budget deficit ceiling of 3 percent of GDP, it is considerably more than the 1.6 percent that the Italian minister of finance informally agreed with the EU over the summer.

For Italy, which suffers from deep structural issues and chronically anemic growth, increasing the target for next year’s budget deficit is imprudent, to say the least. By worsening Italy’s already fragile fiscal position, the higher deficit would limit the scope for adjustment in the event of future shocks.

Italy’s sovereign debt already totals more than 130 percent of its GDP — the second-highest ratio in the EU after Greece. To put the nation on a path toward public-debt sustainability, it should be increasing its primary surplus (the difference between revenues and expenditures net of interest payments), to 3.5 to 4 percent of GDP, according to the Bank of Italy.

Instead, the primary surplus is due to drop to 1.3 percent of GDP next year, from the projected 1.9 percent this year, making it difficult, if not impossible, to achieve the planned debt reduction.

Long-term economic and social considerations almost inevitably collide with short-term political objectives, particularly for populists. Increasing spending today is the only way Italy’s coalition parties can deliver on their grand campaign promises.

Whereas M5S has pledged a form of “citizens’ income” for the poor and the League is committed to tax cuts, both want to repeal the 2011 pension reform that, among other things, raised the retirement age.

For the League, delivering on its electoral pledges is particularly urgent, as it is eager to cement its lead against its former center-right allies — notably, former Italian prime minister Silvio Berlusconi’s Forza Italia — and even M5S before next year’s European Parliament elections.

To be sure, Italy’s ruling coalition is responding, at least partly, to real and serious concerns. The global financial crisis and ensuing eurozone crisis lowered many households’ living standards considerably, and about 5 million people live in absolute poverty.

Real disposable income per capita plunged from 2009 to 2012 and remains below pre-crisis levels, which were already below the prevailing levels prior to Italy’s adoption of the euro.

Moreover, with older households’ real income (and wealth) well above those levels, aggregate data do not capture how grim the situation has become for younger and middle-age households.

However, simply throwing 10 billion euros (US$11.5 billion) at the problem will not fix it.

M5S’s “citizen’s income” would not be sufficient to lift people out of poverty, and it could actually worsen their plight to the extent that it distracts attention from the fragmented and poorly targeted welfare system, not to mention the need for broader structural reforms.

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