Why is Visco’s Bank of Italy obsessed with returning to a primary surplus?
Some passages from the Final Considerations by the Governor of the Bank of Italy, Ignazio Visco, commented by Giuseppe Liturri
In the same days in which US President Joe Biden announces that in 2021 he will make a deficit / GDP of 17%, followed by a robust 8% in 2022, we are still forced to listen, in today's Final Considerations of the Governor of the Bank of Italy, the words "Primary surplus" and "debt reduction". As if, after Galileo Galilei and Copernicus, someone had continued to argue that the Sun revolves around the Earth.
From the speaker of Ignazio Visco we heard that “Thanks to an average life of over seven years, the cost of financing public debt will benefit for a long time from the exceptionally low levels recorded by interest rates in recent years. Even with an economic expansion rate close to that of the decade preceding the financial crisis, the differential between growth and average burden would remain positive for several years.
Under these conditions , a gradual improvement in budget balances, such as to return to a primary surplus just above one per cent of GDP, would allow the debt-to-GDP ratio to be brought back to 2019 levels over a decade. A more sustained growth is within our possibilities and would allow us to accelerate the process of reducing the debt burden. "
The governor gives us good news first, informing us that we are in a very favorable situation with rates on public debt which should always remain below the GDP growth rate. The persistence of this positive differential between GDP and debt rates would allow a stabilization of the debt / GDP ratio, even in the presence of a primary deficit (as demonstrated in many analyzes on debt sustainability). And what does Visco think about? To the reduction of that ratio, thanks to the help of the primary surplus. Yes, precisely what has brought our country to its knees for 25 years, namely the lack of public consumption and investments, is coming back to the fore. Unbelievable, if it were not written in plain sight. There is no point in reminding him that economists from all over the globe have now abandoned these economic policy prescriptions. Perhaps it would be useful to remind him that the Bank of Italy / ECB now hold about 25% of Italian government bonds, the cost of which for the State is effectively neutralized by the dividends collected by the central bank.
This is the time to make primary deficits to grow, as the economist Olivier Blanchard suggests, until yesterday of "slightly" different ideas. Instead Visco is adamant, always the same record. Broken, for years now.
Instead, the governor surprises us with his frankness about the Recovery Fund. He discovered what we told you, initially in solitude, already in May 2020: without respecting the (onerous) conditions set by the EU, not a cent will arrive.
“ The PNRR includes interventions for over 235 billion over a six-year period: a massive plan, to be quickly translated into executive projects, tenders and public works. The design challenge and the commitment necessary for its concrete realization are considerable. The disbursement of European funds is subject to the availability of evidence on the progress of the interventions and the objectives achieved, the result of continuous monitoring.
The discipline thus imposed on the administrations, accompanied by the recruitment of specialized personnel, could have positive and lasting effects on their functioning and on the planning and operational capabilities. "
In the soft language of via Nazionale, the conditions become "availability of evidence", but the concept of subordination is clear. Visco believes that this is a "disciplining" factor, as if until yesterday the PA had been an undisciplined schoolboy who enjoyed turning papers from one office to another, wasting time. We fear that, when the control bar is lowered, haste makes blind kittens. But there will be time to see the effects.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-la-banca-ditalia-di-visco-ha-lossessione-di-tornare-a-un-avanzo-primario/ on Mon, 31 May 2021 11:54:09 +0000.