Since the end of the Second World War (now 73 years) Italy has had 65 governments taking charge of the nation’s affairs. The current incumbent administration is a populist coalition administration between the Five Star Movement and La Liga (formerly the Northern League). The election was seen as a result of public disenchantment with the mainstream parties that had ruled the nation since the end of the war. The putative government almost fell over its nomination of finance minister, but in the end that portfolio was given to a technocrat, Giovani Tria, averting the crisis.
The new Italian government has just published its budget plans which have over-ruled the desires of Mr Tria to keep the government deficit at a 2% of Italian GDP, coming in at 2.4%. Under the rules that established the Euro, a deficit should not exceed 3% of GDP. Running a fiscal deficit means that the national debt will be increased to balance the books. Italian debt currently stands at 131% of GDP (second only to Greece in the Eurozone). The Italian national debt stands at €2.3 trillion already.
The government intends to “end poverty” with its first budget and wants to set a minimum income level for the unemployed (10.4% at the latest count, or 2.7 million people), they also intend to cut taxes, scrap an increase in the retirement age and offer a basic income (for unemployed). An even remotely hawkish fiscal economist would point out that these aims will be paid for by future generations as they will have to serve the debt created by them – however, they will go down well with poorer Italians now.
The budget (which needs to gain parliamentary approval next month) aims to provide basic income for poorer families of €780 per month; cut tax bands from 23 to 43% to 15 to 20%; set minimum pensions and scrap the plans for higher retirement ages.
The EC had been urging Italy to tackle its debt burden – under the convergence criteria, this was constrained to 60% of GDP, but went out of the window when the Global Financial Crisis struck: even German debt is 64.1%. Under the previous Italian administration, the plan was for a deficit of 0.8% in the current budget with an aim to eliminate the deficit by 2020.
Market reaction to the budget plans can be seen in the widening spread between Italian and German government bonds which has emerged since the plans were announced yesterday.