Italy Public Budget Policy

Public budget policy

In the 1980s, the basic imbalance of Italian public finance, as it had emerged in the previous decade, had shown an alarming worsening. In the nineties, the rebalancing action began, at first uncertain, then more decisive and effective. The primary balance turned positive in 1991. A first primary surplus of some consistency (almost 2 % of GDP) it was obtained in 1992 (Tab. 9). That result was consolidated in 1993 (2, 6 %), while in the presence of a very adverse cyclical phase; was being eroded in 1994 (1, 8%). However, the order of magnitude of these surpluses was still insufficient: the public debt / GDP ratio continued to grow, from just over 100 % of GDP at the end of 1991 to almost 125 % at the end of 1994. Indeed, interest payments now reached 12 % of GDP (in 1993), also due to the rise in interest rates associated with the currency crisis. In 1995, in the presence of a new decline in the lira exchange rate, the primary surplus was in any case brought to a value equal to 3.4 % of GDP, but this did not allow for a reduction in the debt / GDP ratio (125.3 % at end of year).

At the end of the 1990s, the Italy has undertaken an effort to consolidate the results obtained, also with the aim of fulfilling the financial stability commitments undertaken within the framework of the European Economic and Monetary Union. In 1996, the budgetary correction continued (the primary surplus rose to 4 % of GDP) and, for the first time in the decade, the debt ratio fell, albeit by less than one percentage point. In 1997 and 1998 the corrective action resumed in order to bring the Italian public budget into line with European standards. Progress from a substantially nil primary balance in 1991 to a surplus of 4.8 percentage points of GDP in1998 is the result of an increase in revenues of about 3 points and a reduction in primary expenditure of about 2 points.

According to travelationary, the most incisive action concerned public spending on social security benefits. Although the total amount of social expenditure in Italy was not out of line with the rest of Europe in recent years, its composition appeared to be completely anomalous: almost two thirds were absorbed by social security benefits, against a share equal to less than half. in the rest of Europe. On the other hand, spending on unemployment and employment, the family, the house and the poor was far less. The composition of expenditure was also geared, to a much greater extent than the European average, to favor self-employed workers and those belonging (current or past) to the ‘regular’ employment market. Such a spending structure,

The income policy

A first experiment in income policy had already matured in the country in the early 1980s, but other income policy schemes found new and stronger impetus during the 1990s.

In 1992 the government, also by leveraging the commitment of exchange rate stability, favored an agreement between the social partners on the definitive cessation of the escalator and on the principles of a reform of the bargaining system. In July of 1993, despite the collapse of the exchange rate and the emergence of related inflationary risks, the agreement was completed and ratified. It established that trade union bargaining is divided into two levels, one centralized (national, category), the other decentralized (territorial, corporate); that the national contract has a duration of two years for the remuneration aspects, four years for the regulatory aspects; that wage growth in the following two years is linked to the ‘programmatic’ rate of future inflation, that is, to that officially indicated as the objective of macroeconomic policy. At the end of the two-year period, if the inflation actually observed has exceeded the ‘programmatic’ one, the parties take this into account in the national contract, evaluating the discrepancy also in light of any ‘terms of trade losses’ in the country. The company contract, in turn, essentially remunerates productivity improvements, possibly providing for forms of worker participation in company profits.

Monetary policy

Already in the first half of the 1980s the foundations had been laid for a turning point in the institutional structure of monetary policy, above all by virtue of the so-called divorce between the Bank of Italy and the Treasury (see Italy: Economic and financial policy, App. V). In the following decade, the institutional structure of the Bank of Italy evolved towards complete autonomy from the government and the definitive functional separation between monetary policy and that of the public budget: the power to vary rates was formally remitted to the central bank alone. interest ‘officers’ on discount and advance transactions; as part of the obligations connected with the launch of the European Economic and Monetary Union, monetary financing of the public budget was prohibited. Monetary policy is now increasingly looking at indicators directly relating to the dynamics of costs and prices, in addition to the traditional ones (monetary base, money, credit and financial assets, interest rates).

From the last months of 1992, and up to mid- 1994, the Bank of Italy, moving from the very high degree of monetary restriction reached at the height of the currency crisis, favored a gradual but continuous decline in short-term interest rates. At the same time, long-term rates and spreads with other more industrialized countries also fell.

In June 1994, however, some warning signs of an imminent rise in consumer price inflation became evident. Having noted the insufficiency of the internal demand containment effects that must have come from budgetary policy, the Bank of Italy again sharpened monetary tightening, raising official rates in August. In February 1995, as has already been mentioned, the financial crisis that rocked Mexico disturbed the currency markets around the world. The external value of the lira suffered a new collapse, of an amount just below that experienced in September 1992, envisaging a risk of a sharp rise in inflation. Monetary policy still accentuated its restrictive stance, averting that risk. With inflation slowed down and expectations stabilized, the Central Bank was able to initiate a cautious policy of easing monetary conditions in the autumn of 1996.

Italy Public Budget Policy