Budget consolidation and economic reform in Italy 1996-2001

by Vincenzo Visco

The centre-left government led by Romano Prodi entered into office on 17 May 1996 inheriting an economic and financial situation that was anything but brilliant. In 1992, after more than 10 years of financial disorder, Italy had been struck by the most severe of currency and financial crises since the end of the war (1945-47): the risks of default were real and the Amato cabinet was compelled to implement very strong corrective measures that started the process of budget consolidation that was then continued by the Ciampi cabinet in 1993, but stopped in 1994 after the electoral victory of Silvio Berlusconi who brought to power a new political class that was openly inexperienced, provincial in many respects, unaware of the Country’s international commitments and with little interest in complying with them. In only seven months the economic conditions worsened rapidly, and this contributed to the collapse of the Berlusconi cabinet. The subsequent Dini cabinet had the task of managing a transition phase and of recovering some credibility with the financial markets after yet another currency crisis in March 1995. However, by the end of 1995, the net borrowing of the public administration was 7.6%, inflation was running at 5.4% (one percentage point higher than the previous year) and the long-term interest rate differential with respect to the German bund was 5.3 points; public debt had finally stopped growing but had in any case settled at levels of around 124% (see Table 1).

In practice none of the parameters set by the Maastricht Treaty seemed to be achievable in time for Italy to join the single currency. And indeed the objectives set by the Dini government for the years following 1995 explicitly excluded this possibility: the official forecasts indicated a net borrowing for the public sector of 4.4% instead of 3% for 1997. At the end of 1996 the situation had improved, thanks to the corrective measure immediately adopted by the Prodi cabinet in June that same year, however (see Table 1) the deficit of the public sector continued to be above 7% and the primary surplus (4.4%) was still well below the level required for a convergence process; only, the debt-GDP ratio was slowly decreasing. Italy, therefore, was outside the Maastricht process, it was considered with scepticism and concern by most, as fairly unreliable by its partners and even worse by the financial markets. No-one thought that Italy could ever join the Euro with the first group of countries. And in fact, only one year earlier, during the crisis of March 1995, several observers had believed that Italy’s public debt condition was likely to reach insolvency: R. Dornbush, for instance, stated that the issue was not so much ‘whether’ the default of the Italian public debt would occur but rather ‘when’.

All this is not surprising since Italy’s reputation with the financial markets and the international community had been strongly undermined owing to the evident inability throughout the 1980s to control the dynamics of the budget and to introduce reforms capable of inducing economic operators to adopt non-inflationary behaviours. Indeed, after the second oil shock, Italy was the country where inflation continued to be highest; between 1974 and 1984 mean inflation in Italy had been 15.8%. Between 1978 and 1992 a unique rift had occurred between foreign and domestic policy, between monetary and fiscal policy: Italy’s joining the EMS and the fact that the Central Bank was no longer under the obligation of financing the public deficit, were indications of Italy’s commitment to reform and put a restraint on the systematic exchange rate adjustments that had come to be an essential instrument of the Country’s economic policy; moreover the adoption of a restrictive monetary policy determined a growth in real interest rates (which had been negative for years). But at the same time, the inability to introduce corrective measures on revenue and current spending in line with the monetary goals and international commitments, was the cause for the rise in public debt. The external constraint therefore did not prove to be sufficient in modifying the traditional domestic behaviour. As can be seen in Table 1, throughout the 1980s revenues increased constantly, but at too slow a pace to be able to absorb the primary deficit which up to 1988 had remained constantly above 3% of the GDP. Primary current spending did increase at the beginning, but after 1983 it stabilised around values between 37% and 38% of the GDP (Table 2), quite similar to the values reached at the end of the recovery process of the 1990s. On the contrary, interest spending doubled from 5% to over 10% of the GDP and as a consequence public debt started growing dangerously. It would have been enough at that time to reduce the primary deficit to zero to rebalance the accounts, but this was not done (only starting from 1998 did the primary debt start decreasing). Substantially, conscious political choices, dictated by foreign policy needs, had challenged the model on the basis of which between the 1970s and the 1980s Italy had held together an increase in public spending of over 6 points and a fiscal pressure that was 10 points below the European average. This model was based essentially on the inflationary tax that would square the balance of public finance ex post, in an occult and expensive manner which nonetheless was substantially accepted by the political forces, and on the subsequent devaluation of the exchange rate that would enable to recover competitiveness. In any case fiscal policy was not capable of adapting to monetary policy choices. The perverse results of this cleavage in the Country’s policies are impressive: in 1980 the public debt-GDP ratio was 57.7% (see Table 1); after three years, in 1983 (Spadolini cabinet), it had gone up by 13 points to 70.8%; in 1987 (after four years of political stability with the Craxi government) the ratio had gone up to 91%; and it continued to grow in the following years, always because of the persistence of large primary deficits and high real and nominal interest rates (see Table 1), reaching 108% in 1992 and 124% in 1994. Only when faced with the risk of collapse did the Trade Unions accept to make wage policies conditional on inflation objectives, and this contributed greatly to avoiding that the two subsequent devaluations (1992 and 1995) would once again trigger massive inflationary surges, thus avoiding also considerable backlashes on real wages.

In summary, Italy appeared to be, and indeed was, a country without an economic discipline, characterised by a low level of social cohesion, mal-governed by a ruling class that was incapable of making brave choices, that yielded in to the requests and pressures exercised by interest groups, and which was increasingly and openly corrupt and therefore less authoritative. In such a situation it is not at all surprising that the adjustments introduced gradually starting from the end of the 1980s, involving above all the revenue side, were not deemed to be sufficient and indeed were ignored by the markets that continued to penalise Italian public debt. Indeed, the primary deficit started to drop in 1988 and reached zero in 1991, but the spending on interest rates continued to grow, increasing from approximately 8% of the GDP in 1998 to a peak of 13% reached in 1993 (Tables 1 and 2). And with it grew the public debt.

In the early 1990s spending on interest rates, together with social security, was the main item on the side of Italy’s public spending. In the eyes of many, this situation was deemed to be unmanageable and beyond the point of return. But indeed, this was not so, as borne out by the facts later, but it was undoubtedly complex and dramatic in many respects. Moreover, the process of progressive adjustments to the primary budget had occurred very gradually through dozens of adjustment measures (at least two every year) without explicitly stating the underlying plan and hence without the participation of public opinion. In a rather unproductive debate, the economists were divided into "gradualists" (worried about economic growth and social unrest) and the advocates of a "shock therapy", which would to some extent be punitive and in any case politically very difficult to implement. The Governing Coalition never sought a bipartisan consensus with the opposition on economic reform, and never did the Opposition raise this issue as being a priority one for the Country. The collapse of the political system in 1993 was the logical consequence of this state of affairs, but it also provided the opportunity for cultural growth on such issues as economic recovery and the modernisation of the economy that lay the foundations for the centre-left alliance and the birth of the Prodi Cabinet.

This was the situation when, in September 1996, the new Cabinet announced Italy’s decision to take part in the Monetary Union right from the start: surprise, bewilderment, disbelief, scepticism and deep concern were the reactions to this piece of news, because Italy was viewed as a risk for the Union, as a danger, rather than as an opportunity. The facts are that in September 1996 Italy was not in the EMS, it had a public deficit running at 7% and more, a public debt that was twice the parameter of reference, an inflation rate which was 2.8 points higher than the average of the three most virtuous Countries in the Community (4.0% as against 1.2% on average for Germany, Finland and Luxembourg; even where the tolerance margin of 1.5 points was taken into account, there still remained a difference of 1.3 points), and divergent long-term interest rates: 9.4% as against the average 6.5% of the three countries with the lowest inflation rates, a value which was one point higher than the reference value even where the 2 deviation points were accounted for. The idea of being able to reverse this situation in only one year could easily appear to be overambitious, even more so because the centre-right Opposition at that time showed no interest whatever in Europe, in the Maastricht parameters, in financial recovery, etc., and hence was not at all willing to cooperate. And even the Majority was somewhat puzzled: it is by no chance that the Dini Cabinet and the Financial Economic Plan (DPEF) drawn up by the Prodi Government had set the objective of reaching a 3% deficit by 1998 and not by 1997, nor should one overlook the fact that the Bank of Italy as well had given its support to this time frame.

Only Commissioner Monti had severely criticized this choice in an interview made in June, to which interview many members of Government, including myself, had reacted somewhat harshly. Things changed completely in September: Ciampi, who was the only person who was truly convinced right from the beginning of the need to make an attempt to join Europe immediately, had included in the Financial Economic Plan a sentence that nobody had picked up and which stated that, in autumn, the Government had reserved itself the right to check and see whether the conditions, (economic and political) that had suggested to postpone the objective by one year, had changed. And when, after the Italy-Spain summit held in mid-September at Valencia, it was clear that Italy was to remain alone (together with Greece) among the countries that would not join the monetary union because it did not meet the requirements and not out of its own choice, then the hesitations of the Majority and of the Government were washed away. The words of contempt spoken by Aznar in closing the Summit contributed to prompting a reaction of national pride that was endorsed by a careful analysis of the statistical data.

Table 1 shows that in 1995 (the most recent data available at that time) the primary surplus had almost reached 4% and it was known that the adjustments introduced for 1996 had further improved the situation, and so by assuming that by joining the European Monetary Union the Italian interest rates would be brought in line with those prevailing in the other European Countries, further structural interventions that would be necessary were deemed not to be excessive. So the problem was not that of raising the primary surplus by 4 or 5 points as could be suggested by looking at the deficit which was above 7% while the objective was 3%, but rather the problem was to create the conditions so that the financial markets would consider the adjustment measure to be credible and eliminate or strongly reduce the interest rate differential between Italian securities and the German Bund. Since in the early months of the Prodi Cabinet this differential had come down by about 80 basic points, the operation was still likely to be successful. In practice, as can be seen from the data in Table 1, all that needed to be done was to introduce a limited structural adjustment to the primary surplus (around half a point), together with a robust one-off measure for 1997 that would give credibility to the intentions of the Government.

The decision to make an all-out attempt was taken in late September at a meeting at Palazzo Chigi which besides Prodi, was attended by the Deputy Prime Minister, Veltroni, the undersecretary of the Prime Minister’s Office, Micheli, and the economic Ministers Treu, Ciampi and Visco. The meeting was short and there was no disagreement, the only possible dissenter being myself. And indeed, having cast aside any possibility of a radical cut in spending for political and time-related reasons, and with the promise of intervening with "Treasury measures", the sole means that remained was tax increases, and this was my job. The "dirty work" that needed to be done to enter into Europe was thus entirely handed over to me. There and then I didn’t even realise that in case of failure, I would be the first and the only one to pay; I went back to the Ministry, called a meeting of my aides and informed them of the decisions taken: they all reacted with a silence laden with concern but with absolute determination, which was a confirmation of the unifying force that the European objective had and of its being shared without reservations by the Cabinet and by the majority coalition. As a consequence the measures that had already been announced were appropriately upgraded; in November Italy asked to be reinstated into the EMS and the markets showed their support by contributing with a further reduction of the interest rate differential. The whole operation continued in the midst of both domestic and international debates, scepticism (and a further additional manoeuvre in March that raised very strong controversies), and attempts to sabotage the whole operation. The facts are, however, that 1997 ended with a 2.7% public sector net borrowing, and with the full compliance with all the Maastricht criteria, except the one on the debt stock that in any case had gone down by two and a half points that year.

Moreover, in spite of the strong adjustment measures that had been adopted, the GDP increased by 1.7%, quite a remarkable result in such circumstances. In substance the operation consisted in trading a one-off tax increase and a slight structural adjustment of the primary budget against a permanent reduction in interest spending, a reduction which was initially more than 2 points but which was to increase in time (see Table 1).

Very few people understood the rationale of the operation at that time; even the most authoritative economists were sceptical and puzzled: and only once things had happened did some of them analyse and understand what had actually happened (see Chiorazzo e Spaventa, 2000). In any case the risk that the Prodi Government had taken was extremely high.

Success depended essentially on the credibility and determination of the Government, especially of the Minister of the Treasury, and on the ensuing positive response of the markets that, by completely turning around their previous behaviour, now saw Italy’s exclusion from the European Monetary Union more as an anomaly and a danger than as a positive fact. The scepticism that many harboured, both in Italy and abroad, was instead based on the traditional belief that Italy and its ruling class were unreliable and on considering this effort as being useless and the target being unsustainable over time. In any case, the data relative to the subsequent years confirm the sustainability of the recovery process over time (see Table 1).

Further information about the structural characteristics of the economic recovery process is provided by Tables 3 and 2 with regard to the tax system in Italy and the structure of public spending during the 1990’s. As can be seen, except for 1992-1993 the years immediately preceding the first major adjustment of the budget, and for 1997, which show peaks in tax collection, the tax burden remained stable at the levels of the previous years, around 42% of the GDP, and hence at levels comparable with the European average, but lower than the levels in a number of countries, for instance France. Therefore it is not right to state, as is often the case, that the Italian economic recovery effort was based on an excessive fiscal burden that interfered negatively with economic activities. Instead, reality shows that throughout most of the 1970s and 1980s the Italian public sector had deceived itself into believing that it could fund its increasing spending with clearly insufficient taxes (hence building up a deficit), and so it was necessary to implement a strong increase in revenues in just a few years, a measure which was already completed by the early 1990s but about which there is still debate and confusion (see Tables 1 and 3). The debate on the levels and appropriateness of the tax burden and of public spending in Italy continued throughout the 1980s and is still underway. Indeed, the biggest disagreement (often implied) is the following: can Italy, a fragile country, characterized by small and micro enterprises, by a provincial class of entrepreneurs, by the absence of a class of professional managers, by a family-based and not a market-based type of capitalism, by historic social tensions, and by a political leadership that is periodically unreliable, can this Country afford a European welfare system, competitive markets, adequate corporate governance, and satisfactory levels of taxes and tax compliance? A closer look will show that the very answers that can be given to these questions will clarify and help understand the divisions that emerged at that time and that are still fuelled between the Euroscepticals and the advocates of our being part of the European Monetary Union; and also the divisions between the vision and programs of the centre left and those of the coalition built up by Silvio Berlusconi. Luckily enough, from my standpoint, we have joined Europe and this is a reasonably irreversible event.

As concerns spending, Table 2 shows that, with respect to the peak reached in 1993 (57.6% of the GDP), overall spending dropped by 10.3 points in 2000, thus releasing massive resources for the private sector. However, as much as 6.5 points of this reduction derive from a decrease in interest rates, and only 3.8 points from a reduction in primary spending, the biggest single item being spending on the Public Administration employees. And even if Italy’s primary current spending, has always been, and still is, below the European average (by some 3 points of the GDP), there are no doubts that from this standpoint more could have been done; especially with regard to pension spending which has remained unchanged over the last few years, but which, in spite of 3 or 4 reform measures, is still bound to grow in the coming decades. In any case the balance reached today by Italy’s public finances is clear: the tax burden is the same as the European average while the level of primary current spending is lower than the European average and sufficient to fund the extra interest spending accruing from the extra debt which, at rates that are (almost) equivalent to those of other countries, is nevertheless (at least) twice that of the countries that have a stock of debt in line with the reference parameter (60%). These remarks explain, on the one hand, the discomfort of Italian tax-payers who, faced with high taxes do not get services that match that value, and they also account for the weaknesses that still exist in the Italian budget and in public finance. Indeed, an increase in market interest rates will have immediate negative repercussions on our budget that are twice those of other European countries. The structural rigidity of the budget is such that it would take only a slight lack of attention, or a slight relaxation to end up with substantial deviations from the convergence criteria . Unfortunately this is what is happening in Italy today (October 2002), after just over one year of government by a political right-wing that is substantially Euro-sceptical and characterised by strong populist drives. The inherent fragility of the balance reached should be a sufficient reason for stepping up the privatisation processes, slightly increasing the level of primary surplus, completing the social security reform and putting more effective spending restraints on the Regions and local authorities.

While carrying out the process of budget consolidation, the centre-left government also introduced and developed some important economic reforms. In actual fact even before 1966, the Amato cabinet and the Ciampi cabinet had started to lay the foundations for transforming the Italian economy characterised by an abnormally large presence of the State, into a more market-oriented economy which would be better suited to a global competitive context. These reforms received a new impulse from the centre-left governments. At the same time, however, and being the result of a primary need, a radical tax reform was introduced prompted by political reasons and by the need for efficiency and rationality. Indeed, in 1996, the Italian tax system was close to collapsing: it was inefficient and disproportionate, characterised by huge loopholes and massive evasion; it encouraged distortions in the investment and financing policies of enterprises (with unparalleled tax incentives to indebtedness), hated by tax-payers and impossible to reform according to many. When the time came to ask the Country to make an effort and pay more taxes (albeit only temporarily), it seemed the right moment to introduce a radical turnabout in this sector, all the more so because the Opposition of that time, in particular the Northern League, had boldly exploited the dissatisfaction of the tax-payers by organising revolts and tax strikes (that luckily were unsuccessful) and even threatening to have the North break away from the rest of the Country. Moreover, the levy system in Italy was absolutely unsuited to ensuring Italy’s presence in the international markets both with regard to collecting adequate levels of taxes and to ensuring an efficient allocation of resources. The reform involved the entire system and was conceived to leave unchanged the total amount of taxes collected, which implied redistributive effects that not everybody appreciated: the structure of the tax rates on income was changed, by reducing the number of rate brackets and to some extent also the rates: the highest rate was set to be 45% (the initial proposal by the Government had been 41%); taxation of corporations was totally changed by eliminating several high rate taxes that yielded small levels of revenue which together with the health contributions, were replaced by a single tax proportional to the income produced by the company (added value) and whose overall rate was much lower (4.25%); the corporation income tax was based on the Scandinavian DIT, integrated by an additional levy on extra profits following the ACE proposal by the Institute for Fiscal Studies of London (see IFS, 1991), with the aim of strongly reducing the gap between the taxation of profits and that of interests; the VAT taxable base was widened and the rates were unified into two levels; a system of ‘fiscal federalism’ was created so as to give financial autonomy and responsibility to the Regions, Provinces, and Municipalities; the taxable bases of income tax and of social contributions were unified and overall social contributions were reduced by 4 points; guidelines were drafted for the smaller enterprises to limit tax evasion (through sectoral surveys); also other minor taxes were either eliminated or rationalised (on vehicles for transportation, on entertainment, etc.); sweeping changes were introduced in the tax collection system, in the issuing of penalties (both administrative and penal), and in making tax assessments, and finally, a telematics system was introduced so that tax-payers could forward their income statements and make payments by computer (today more than 90% of income statements are forwarded by computer).

The results of the reform were considerable: as can be seen in Table 4, after the peak in 1997, the overall tax burden went back to the previous levels and has thereafter remained virtually unchanged; what has changed, instead, is its composition, with a reduction (intentional) of the weight of social contributions and an increase in indirect taxes. But what is most important is that between 1998 and 2001 tax and social contribution abatements amounted to as much as 4 - 5 points of the GDP. This is evidence of a reduction in evasion and improvement in tax compliance which is unparalleled in the history of Italy in recent decades. But also the structure of taxes on enterprises has changed radically without reducing the yield (which on the contrary has increased) so that the taxation of corporations is now one of the most favourable in Europe (see Table 4). The fact that the new government has decided to do away with the DIT and has increased taxes on enterprises raises bewilderment and concern.

As regards the other economic reforms, many initiatives have been taken in the area of the labour market, the public administration, changes in company law and the functioning of the financial markets, liberalisation (in trade, communications, electricity, gas, postal services, transportation, insurances) and strengthening of the role of independent authorities. Moreover, the postal service, railways and other public companies, that had always run a deficit, have their balance sheets in order now and some are in the process of being privatised (for instance the tobacco monopoly). In this regard I would like to quote the conclusive paragraph of the OECD report of March 2001: "Regulatory Reform in Italy", page 8: "The Italy of 2001 is far different from the Italy of 1990. Step by step, the interventionist producer-oriented, rigid and centralised state of post-war years is being transformed into a market-based, consumer-oriented and decentralised state. This is being done through a continuing programme of privatisation, market liberalisation and opening, deregulation followed by re-regulation, institution building, and regulatory quality initiatives. Although it is still early, Italy is beginning to see concrete benefits of regulatory reform, as well as adjustment costs. Considering the starting point and the difficulties of reforming when governments are short-lived, the progress is impressive" (OECD, 2001).

Important results were also obtained from the labour market reforms. Between 1998 and 2001the participation rate grew from 58.7% to 60.4 (still a very low level compared with European averages) and at the same time the unemployment rate decreased from 11.8% to 9.5%. Some 1.4 millions new jobs were created in four years. A positive impact on the increase in employment came also from the introduction of the employment tax credit that helped the exit of many workers from the informal sector of the economy.

The privatisation programme accomplished by the centre-left governments was also extremely important. This process too had been started by the previous Amato and Ciampi Cabinets which had laid the legal foundations for starting the divestment (setting up independent authorities, transforming the legal nature of the state-owned companies, etc.), and had started with the first transfer which had yielded some 19.2 billion Euro in the 1992-1995 period (some ITL 37.200 billion). But the most sizeable portion of the privatization process was accomplished between 1996 and 2001 for a total amount of over Euro 82 billion (some ITL 160.000 billion), which rises to Euro 94 billion (ITL 182 Bn) where also the debts of privatised companies are taken into account (Tables 5 and 6). Privatisations gave a strong impulse to the transformation of the Italian economy and to the modernisation of the Country’s production and financial structure, leading to the State pulling out almost entirely from most of the economic sectors in which it had been directly involved, in both the ownership and the management, for over 50 years. The proceeds from the privatisation process contributed to reducing Italy’s public debt and, thanks to the privatisations, the financial markets expanded considerably and took on a more modern structure: in the period being considered, the Italian Stock Exchange increased by 400%, growing from a capitalisation of some 10% of the GDP in the early 1990’s, to 70% in the spring of 2001, therefore, similar to that of the main European countries. New laws were passed that were aimed at ensuring greater transparency and contestability of companies and a greater protection of the rights of minorities; the structure of financial brokerage and of the markets was modernised. New professional profiles emerged and new job and investment opportunities emerged, as well, while savers were given the opportunity to diversify their portfolios by being able to purchase stocks instead of the traditional Treasury bonds that had become less attractive because of the reduction in interest rates. If the values reached prior to the recent crisis of the Stock Exchange are considered, it can be noticed that the small savers who invested in the shares of privatised companies obtained yields that were decidedly higher than they would otherwise have obtained by investing the same amount of money in Treasury bonds. Even though the presence of the State in the Italian economy is still quite significant, much has been done and it is not by chance that the Italian privatisation process has been included amongst the best practices pointed out by the Commission to the Member Countries of the Union. In the intentions of the centre-left government, the privatisation process was to continue steadily throughout time spreading out to the companies running public services at the local level, as well as such enterprises as the Postal Services and the Railways that in past years have undergone a sweeping reorganisation and economic recovery process.

What are the prospects of the Italian economy for the next few years after a year and a half of Berlusconi’s Cabinet in power? In Italy’s current situation no-one can make reliable forecasts for the medium term: there are too many variables and political uncertainties.

What can be observed is that in 2002, for the first time after 10 years, there are no doubts that there is a sharp reversal in trend in the balance of public accounts. Excluding the one-off revenue (sale of buildings, fiscal amnesties, etc.), the trend of the deficit of the Public Administration for 2002 is far greater than 3%; the trend for 2003 is now above 4%.

For the first time after seven years the risk is that also the debt-GDP ratio may go up. The structural deficit, if cyclical components are excluded, varies, in dependence of estimates, between 1% and 2% of the GDP. It has also been calculated that in only one year the current Government has reduced taxes and increased spending without having the resources to do so for an amount of around 25 billion Euro; this means that a sound management of public finances, restricting itself not to spending resources that were not available would have enabled- in spite of the economic crisis – to comply with the parameters indicated in the stability pact. The fact is that – as has been noticed in spite of the consolidation of the budget in the 1990s (or rather because of it), Italy’s public budget is structurally very rigid owing to the enormous weight of the interest rates on public debt and offers restricted room for manoeuvre: if these margins are forced while deciding at the same time to cut taxes and increase public spending, and relying only on economic growth to square the balance, financial disaster is certain. Unfortunately this is precisely what the current government has done, applying to Italy a naïve version of a supply-side model (a la Laffer). Unless this approach is reversed (and there seem to be no signs in this direction) the Country runs the risk of finding itself in very serious difficulty.

At the same time the privatisation processes have been stopped, and the announcements made by the government on the issue have been vague and contradictory. There is silence about liberalisation. Action is being taken to change company law with the aim of reducing the contestability of companies, of protecting them from the market and from competition. New room has been given to processes of political intermediation that may create red tape and re-open the doors to corruption ….

It cannot be ruled out that, once it has completed its apprenticeship and come to terms with reality, the Berlusconi government may decide to abandon its essentially dream-like vision of the economy and turn its economic policy line around; just as it is possible, in theory, that faced with the outbreak of a severe budget crisis it may decide to intervene with adjustments to pension and health spending that go beyond the points reached by the previous governments; or become more determined in starting again the privatisation and liberalisation processes, in increasing investments not only in the South of Italy, but also in research, in the new technologies, in human resources, etc.; that is to say that one cannot entirely rule out the possibility that in the next few years the Government may actually start doing what the Country needs, but in the meantime we run the very serious risk that Berlusconi’s dreams may become a nightmare for the Italian people.

Tab.1 Italy General Government (as % of GDP)

	1980	1981	1982	1983	1984	1985	1986	1987	1988	1989	1990
Current Revenues	33.6	34.8	36.5	38.3	38.1	38.6	39.4	39.5	39.8	41.6	42.4
Capital account	0.3	0.3	0.9	1.2	0.5	0.3	0.3	0.3	0.3	0.4	0.2
Current Expenditures	37.8	41.6	43.4	44.9	45.1	45.1	45.7	45.3	45.6	46.7	48.9
Capital account	4.4	4.9	5.2	5.1	5.0	6.1	5.4	5.5	5.2	5.1	5.4
Net borrowing	-8.3	-11.4	-11.2	-10.5	-11.5	-12.3	-11.4	-11.0	-10.7	-9.8	-11.8
Primary balance	-3.2	-5.3	-4.2	-3.1	-3.5	-4.5	-3.1	-3.2	-2.8	-1.1	-1.3
Interests	5.1	6.1	7.0	7.4	8.0	7.8	8.3	7.8	7.9	8.8	10.5
Public debt	57.7	59.9	64.7	70.8	76.3	82.7	86.5	90.6	92.9	95.8	98.5

	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001
Current Revenues	43.5	43.8	46.4	44.6	44.7	45.4	47.0	45.7	46.2	45.4	45.5
Capital account	0.3	2.2	0.9	0.4	0.9	0.4	1.0	0.7	0.5	0.4	0.3
Current Expenditures	50.6	52.1	53.3	50.6	48.5	49.1	47.2	45.5	44.6	43.6	43.9
Capital account	4.9	4.6	4.3	3.7	4.6	3.8	3.5	3.8	3.9	3.7	4.1
Net borrowing	-11.7	-10.7	-10.3	-9.3	-7.6	-7.1	-2.7	-2.8	-1.8	-1.7	2.2*
Primary balance	0.2	2.0	2.8	2.1	3.9	4.4	6.7	5.2	5.0	5.0	4.1
Interests	11.9	12.6	13.0	11.4	11.5	11.5	9.4	8.0	6.7	6.5	6.3
Public debt	100.6	107.7	118.2	124.3	123.8	122.7	120.2	116.4	114.6	110.5	109.8

Source: Banca d’Italia

* Net borrowing grew to 2.2 after the Eurostat decision of shifting extra revenues obtained in 2001 and equal to 0.6 of GDP to subsequent years. This means that the actual net borrowing in 2001 was –1.6%.

Tab.2 General Government Expenditures (as% of GDP)

	1980	1981	1982	1983	1984	1985	1986	1987	1988	1989	1990
Primary current expenditures	32.7	35.5	36.4	37.5	37.1	37.3	37.4	37.5	37.7	37.9	38.4
Compensation of employees	11.1	12.2	12.0	12.1	12.0	11.8	11.7	11.9	12.1	11.9	12.6
Purchases of goods and services	3.9	4.1	4.3	4.5	4.5	4.9	4.7	4.9	5.0	4.9	4.9
Social benefits	14.4	15.9	16.5	17.5	17.1	17.4	17.4	17.5	17.6	17.9	18.1
Other	3.4	3.4	3.6	3.4	3.5	3.3	3.6	3.2	3.0	3.2	2.8
Capital expenditures	4.4	4.9	5.2	5.1	5.0	6.1	5.4	5.5	5.2	5.1	5.4
Gross fixed capital formation	3.2	3.7	3.8	3.7	3.6	3.7	3.5	3.5	3.4	3.3	3.3
Other	1.2	1.2	1.4	1.4	1.4	2.4	1.9	2.0	1.8	1.8	2.2
Primary total expenditures	37.1	40.3	41.5	42.5	42.1	43.4	42.8	42.9	42.9	43.0	43.8
Interest	5.1	6.1	7.0	7.4	8.0	7.8	8.3	7.8	7.9	8.8	10.5
TOTAL EXPENDITURES	42.2	46.4	48.5	49.9	50.1	51.2	51.1	50.7	50.8	51.8	54.4
	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001
Primary current expenditures	38.7	39.4	40.3	39.2	37.0	37.6	37.9	37.4	37.8	37.1	37.6
Compensation of employees	12.6	12.4	12.3	11.9	11.2	11.5	11.6	10.7	10.7	10.5	10.6
Purchases of goods and services	5.0	5.1	5.2	5.2	4.8	4.8	4.7	4.8	5.0	5.0	5.1
Social benefits	18.2	19.0	19.4	19.5	18.7	18.9	19.4	19.1	19.3	18.9	19.1
Other	2.9	2.9	3.3	2.8	2.4	2.7	2.4	2.5	2.5	2.5	3.4
Capital expenditures	4.9	4.5	4.3	3.8	4.6	3.8	3.5	3.8	3.9	3.7	4.1
Gross fixed capital formation	3.2	3.0	2.6	2.3	2.1	2.2	2.2	2.4	2.5	2.4	2.5
Other	1.7	1.5	1.7	1.5	2.5	1.6	1.3	1.4	1.4	1.3	1.6
Primary total expenditures	43.7	44.0	44.6	43.0	41.6	41.4	41.4	41.2	41.7	40.8	41.6
Interest	11.9	12.6	13.0	11.4	11.5	11.5	9.4	8.0	6.7	6.5	6.3
TOTAL EXPENDITURES	55.5	56.6	57.6	54.3	53.2	52.9	50.7	49.2	48.4	47.3	48.0

Source: Banca d’Italia

Tab. 3 General Government: tax burden (1980-2000 as % of GDP)

	1980	1981	1982	1983	1984	1985	1986	1987	1988	1989	1990
Indirect taxes	8.7	8.3	8.6	9.2	9.3	9.0	9.1	9.5	10.0	10.4	10.7
Direct taxes	9.7	11	11.9	12.4	12.6	13.0	12.9	13.3	13.4	14.3	14.2
Other	0.1	0.1	0.5	1.1	0.3	0.1	0.1	0.1	0.1	0.2	0.1
Social security contributions	12.8	12.9	13.8	14.1	13.6	13.6	14.0	13.8	13.7	14.1	14.4
Of which: actual social contributions											12.9
TAX BURDEN	31.3	32.3	34.8	36.8	35.8	35.7	36.1	36.7	37.2	39.0	39.4

	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001
Indirect taxes	11.1	11.3	12.0	11.8	12.1	11.8	12.5	15.3	15.2	15.1	14.6
Direct taxes	14.3	14.6	16.0	14.9	14.8	15.3	16.0	14.3	14.9	14.5	15.1
Other	0.2	2.0	0.7	0.1	0.6	0.3	0.7	0.4	0.1	0.1	0.1
Social security contributions	14.9	15.1	15.3	15.0	14.7	15.1	15.3	12.9	12.8	12.7	12.7
Of which: actual social contributions	13.3	13.4	13.5	13.2	13.0	14.7	14.9	12.5	12.4	12.4	12.4
TAX BURDEN	40.5	43.0	44.0	41.8	42.2	42.5	44.5	42.9	43.0	42.5	42.4

Source: Banca d’Italia

Tab. 4. Average and marginal effective tax rates by country, and cost of capital for corporations in the EEC (2001).

countries	Statutory rate (1)	effective average tax rate (eatr)	effective marginal tax rate (emtr)	cost of capital
austria	34.00	27.9	12.6	5.7
belgium	40.17	34.5	22.4	6.4
germany	39.35	34.9	26.1	6.8
denmark	30.00	27.3	21.6	6.4
spain	35.00	31.0	22.8	6.5
greece	37.50	28.0	16.9	6.0
france	36.43	34.7	31.8	7.3
finland	29.00	26.6	21.3	6.4
italy	40.25	27.6	-15.9	4.3
ireland	10.00	10.5	11.7	5.7
luxembourg	37.45	32.2	20.7	6.3
the netherlands	35.00	31.0	22.7	6.5
portugal	35.20	37.0	21.0	6.3
sweden	28.00	22.9	14.3	5.8
great britain	30.00	28.3	24.8	6.7
average (non weighted) excluding italy	32.65	29.1	20.8	6.3

Source: European Commission: Company Taxation In The Internal Market (2001)

(1) Local taxes included

Tab. 5 – Proceeds from privatizations (1996 – February 2001)

Seller	1996 Bn. lire	1997 Bn. lire	1998 Bn. lire	1999 Bn. lire	2000 Bn. lire	2001 Bn. lire	Totale Bn. lire	Totale Bn. Є
Treasury	13.573	38.114	19.702	36.031	1.132	5.268	113.820	58.78
IRI Group	3.553	2.797	4.158	11.081	19.882	984	42.455	21.93
Of which IRI S.p.A.	497	730	1.152	8.206	19.433	984	31.002	16.01
ENI Group	1.199	1.007	1.185				3.391	1.75
Total	18.325	41.918	25.045	47.112	21.014	6.252	159.666	82.46

Source: Ministero del Tesoro: "Libro bianco sulle operazioni di privatizzazione", 2001.

Tab. 6 – Privatizations as a share of GDP (million Є)

Year	Treasury	IRI Group (1)	Total	% PIL
1992		396	396	0.04%
1993		2.000	2.000	0.24%
1994	3.267	3.472	6.739	0.78%
1995	4.596	3.085	7.681	0.92%
1996	7.010	1.835	8.845	0.91%
1997	19.685	1.445	21.130	2.05%
1998	10.175	2.147	12.322	1.16%
1999	18.609	5.723	24.332	2.21%
2000	585	10.268	10.853	0.94%
2001 (2)	2.721	508	3.229	0.27%

1. Debts transferred to the buyer

2. March 2001

References

1. Institute of Fiscal Studies (1991): Equity for Companies: A Corporations Tax for the ’90’s.

2. Ministero del Tesoro del Bilancio e della Programmazione economica (2001): Libro Bianco sulle operazioni di privatizzazione 1996-2001.
3. OECD (2001) Review of Regulatory Reform: Regulatory Reform in Italy.
4. Onofri P. (2001): Un’economia sbloccata, Il Mulino.
5. Spaventa L. – Chiorazzo V. (2000): Astuzia o virtù? Come accadde che l’Italia fu ammessa all’Unione monetaria, Donzelli.