Budget Reform in Italy

Italy’s senate approved today a plan to cut government spending for the period 2011-2014. Italy’s public debt is more than 100% of GDP and the fiscal deficit was between 3% to 5.9% of GDP for last year. Similar situation is shared by other European countries like Greece, Spain, Germany, Portugal, Ireland and France. Europe, in itself, is facing too much debt and a heavy fiscal deficit; to avoid default (sometimes called debt restructuration or debt reduction) budgets have to go from deficit to surplus. This can only be done through a reduction in spending if tax burden cannot be increased. But to cut government spending is facing strong opposition by the citizens as manifested in different public manifestations. Italy’s senate, however, just approved a reduction in spending for the next years.

The reform is for a total of 79.000 million of Euros according to the following schedule:

1. 2011: 3000 millions
2. 2012: 6000 millions
3. 2013: 25.000 millions
4. 2014: 45.000 millions

The largest decisions of what spending should reduced are postponed to the following legislature term. Some of the commented aspects in the news about this reform consist in cutting travel budget for politicians and government employees (with exception of high rank officials, for example the President). Visits to specialized doctors by the citizens will be charged. The increase in the retirement age will take place in 2013, sooner than planned. Also, a reduction is planned for privileged retirement plans.

Interestingly, a proposed constitutional reform was also brought to the table to add a golden rule that will require fiscal stability. These kind of rules usually don’t make harm. If they are not followed, then the politicians needs to explain why they are breaking a constitutional norm. It adds, as if it were, a political cost. But if there’s not clear punishment to deviate from the constitutional requirement it will hardly bind the politicians constraint. Who will be responsible to check if the golden rule is being followed and what will be his cost if he fails to do his job? Will he, for example, lost his position? Some analogies with the European countries are pictured with the Argentinean situation in 2001, where it had to be decided between cutting spending to avoid default or leave the monetary regime and depreciate the peso. But before that, a golden rule was approved by the Congress with null effect. Ultimately the solution rests on political commitment, not on written rules and norms.

But, even though Italy’s effort may help their situation, it is not enough to deal with the Euro problem. It is not Italy the one that is bankruptcy, but the whole area. Why would Italy pay the bills so that other countries don’t have to go through the same process? The big problem is who is going to carry the burden of the present situation.

The reluctance to help small Greece makes other countries wonder what their fate will be, Italy is a much bigger economy (and problem) than Greece. If Greece is too expensive to be saved, what can be done, for example, for Italy, Spain or Germany, let alone all of them? The events that have been taking place in Greece, and now in Italy, can just be a sample of what it ahead in the road, not only for Europe, but for the United States as well.

Nicolas Cachanosky is a doctoral student in economics at Suffolk University, as well as a previous Sound Money Essay Contest winner.

Image: renjith krishnan / FreeDigitalPhotos.net

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