“Every promise is debt – think about it,” screams the message below a huge, ticking ‘debt clock’ that greets passengers at the main train stations in Rome and Milan.
The digital clocks, installed by a think tank, update Italy’s €2.3 trillion debt in real time, urging voters to fear election promises that analysts say could send the debt spiralling out of control after next month’s vote.
At a record 132 per cent of gross domestic product, Italy’s debt is the highest in the eurozone after Greece’s, leaving the country potentially vulnerable to a repeat of its 2011 crisis, when soaring borrowing costs took it to the brink of bankruptcy.
In an unusual foray into politics, Bank of Italy Governor Ignazio Visco warned that parties’ pledges to slash taxes and hike spending “could prove counterproductive, since the problem of the national debt cannot be sidestepped”.
The conservative coalition that leads opinion polls going into the March 4 election has what analysts say is the most extravagant programme: sweeping tax cuts, higher public pensions and a boost in welfare provisions.
Its flagship policy is a flat tax below 23 per cent for individuals and companies, replacing the current staggered rates ranging from 23 to 43 per cent. That would cost €50 billion to €80 billion, depending on the rate adopted.
The anti-establishment 5-Star Movement and the ruling Democratic Party (PD) are only slightly less generous. They also promise to cut taxes, hike spending and raise the annual budget deficit from levels already agreed with the EU.
What leaves economists scratching their heads in disbelief is that the parties, conscious of concerns over public finances, also promise to drastically reduce the debt.
Silvio Berlusconi’s Forza Italia (Go Italy!) party, the mainstay of the centre-right alliance, says it can cut debt by 30 percentage points in five years to 100 per cent of GDP. The PD pledges the same reduction in 10 years. 5-Star promises a 40-point cut in 10 years.
“They are just trying to trick us, they are throwing out random numbers that make no sense,” said Roberto Perotti, an economics professor at Milan’s Bocconi University and a former government consultant on public finances.
Increasing the deficit to lower the debt flies in the face of the economic orthodoxy that has reigned in Europe for decades. But Italian parties of all stripes say belt-tightening has failed and a new approach is needed.
They are just trying to trick us, they are throwing out random numbers
Growth is the key, they say. Stimulating Italy’s chronically sluggish economy will create jobs, increase tax revenues and expand GDP – and debt as a proportion of GDP will finally come down.
Carlo Cottarelli, a former Treasury official and head of fiscal affairs at the International Monetary Fund, was highly sceptical. He said all the parties’ programmes “have very optimistic economic scenarios... and no consistency between the measures announced and debt-reduction targets.”
Most of the programmes include some reference to spending cuts, but analysts say these are too vague to be credible and fall far short of what would be needed to balance accounts.
Perotti estimated the centre-right’s economic programme would cost up to €160 billion and push up the debt-to-GDP ratio by at least seven percentage points per year.
He dismissed the idea that a boost to growth could make the measures self-financing, saying GDP would have to grow about 10 per cent to pay for the flat tax alone.
“In the first year, GDP would rise but then you would get another debt crisis and you’d have to hike taxes,” he said. “It would be like 2011 all over again but worse.”
Lorenzo Codogno, head of LC Macro Advisers and a former Treasury chief economist, said that the parties’ proposals would “definitely” raise the debt, and it was “totally implausible” that by generating growth they could shore up public accounts.
Forza Italia has said it will fund its flat tax by ending many tax breaks and incentives currently available to families and firms, covering areas from home improvements to road haulage and company investments in machinery. But, in the past, even modest proposals by the Treasury to reduce these so-called “tax expenditures” have been rejected because politicians feared losing the support of those affected.
“We can only consider it a credible plan if they tell us which tax expenditures they plan to cut,” Codogno said.
So far, bond markets have seemed relatively untroubled by Italy’s election, possibly because they expect the parties not to follow through on their promises. Perotti said this complacency may be misplaced.
“They won’t do everything but they have to do something,” he said. “Even if it’s just the flat tax and raising welfare benefits that will be enough to significantly push up the debt.”