Here is the Draghi government’s strategy on public debt
The main variable to reduce public debt is GDP growth. Even better if it is accompanied by limited inflation. And then, if the other variables of the macroeconomic framework allow it, the only real chance is that of an expansionary policy, which aims directly at revitalizing the economy.
In the issues of the last Def, the document that anticipates what should happen between now and the end of the year, there is a little mystery, which must be carefully examined. We will then discover the deeper logic that oversees public finance balances, providing one of the keys, perhaps the most important, to solve the main Italian puzzle: constituted, as is well known, by the excess of public debt. An imbalance that, in the past, justified austerity policies, which unfortunately did more harm than good.
The figures are merciless. Last year, according to an analytical table in the document (see page 95), the public debt / GDP ratio had increased by 21.2 points. The highest increase ever in peacetime. Further demonstration that what we are experiencing, with that immense number of deaths from the pandemic, over 110,000, is nothing more than a real war. Whose toxic effects affect all conditions of our life. Including the movement of large financial aggregates.
The Def explains how this happened. The budget deficit was found to be 9.5 per cent. A figure that can be broken down as follows: 3.5 for interest and the rest, and 6 per cent (primary deficit) for lower revenues due to the underlying economic crisis and higher spending, especially for social interventions.
The Def only lists this second figure in the table. He then adds a datum that indicates with the term: snow-ball effect. What is it about?
In Italian, the translation is: snowball. The avalanche that occurs when a small landslide from the top of a mountain turns into an avalanche. From a financial point of view, it reflects the difference between the nominal GDP growth rate and the interest rate. If the former exceeds the latter, the debt / GDP ratio falls, otherwise it rises. Then there is a third element: “Stock-flow adjustment”. These are more or less extraordinary revenues linked, for example to privatizations, or other management choices. Their incidence, at least in the forecasts up to 2024, is considerably limited: not exceeding 0.2 basis points.
We come to the amounts. In 2020 the debt / GDP ratio increased by 6 points, due to the primary deficit, the snowball effect had an impact of 14.8 points, while the adjustment was equal to 0.4. The sum of these factors gives 21.2, which is equal to the increase recorded. The debt / GDP ratio has in fact gone from 134.6 per cent to 155.8. How did the different factors affect? The primary deficit for 28.3 per cent, the snowball effect for 69.8 per cent and the adjustment for 1.8. The conclusions are therefore easy: the difference between the nominal GDP decrease rate and the interest rate has had an effect more than double (2.47) compared to the deficit.
The scheme applied to 2021 gives, in turn, consistent results. In this case the budget deficit is even greater: according to forecasts, equal to 11.8 per cent, against the previous 9.5 per cent; but, in this case, nominal GDP, instead of decreasing as happened the previous year, is expected to increase by 5.2 per cent. Consequently, an even greater primary deficit (8.5 versus 6 per cent) corresponds to a snowball effect which reduces its impact. So the deficit / GDP ratio increases by only 4 points, instead of the 21.2 of the previous year.
It is therefore easy to identify the moral underlying the data that have been provided. The main variable to reduce public debt is GDP growth. Even better if it is accompanied by limited inflation. And then, if the other variables of the macroeconomic framework allow it, the only real chance is that of an expansionary policy, which aims directly at revitalizing the economy. Which means: investments more reforms. Starting with taxation and civil and criminal justice.
Tax reform is needed not so much to accentuate the progressive nature of the tax. Given that the difference between the contribution offered by the wealthiest classes and the average taxpayer, in the case of personal income tax, is more than significant. But to adapt a decades-old tax system to the changed conditions that regulate the economic and social development of the country. The surest way to break down those levels of tax evasion and avoidance that today repel the civil conscience of the country. So no concession to welfare, but rigor in the use of greater financial resources, which a larger budget deficit can guarantee. Only in this way, in fact, will the higher deficit correspond to an even higher rate of growth in GDP, so that the debt / GDP ratio will tend, however, to decrease.
Columbus's egg? In theory, yes. In practice, much less. The obstacles are not so much of an economic nature, but psychological and political. As long as those values prevail at the bottom of Italian society which, over the past decades, have led to this ten-year stagnation, it will be difficult to get out of the ditch into which the country was thrown.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/ecco-la-strategia-del-governo-draghi-sul-debito-pubblico/ on Sun, 18 Apr 2021 14:26:32 +0000.