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The real problem with Italy’s budget

In an unprecedented move, the European Commission has rejected the budget plan drafted by the Italian government. It did so on the grounds that the plan deviates from budget deficit targets that had been previously agreed upon by Italy’s previous governments. The draft budget endangers Italy’s debt position and fails to address the country’s structural deficit, according to the Commission. 

The Italian government has indicated that it does not plan to make any changes to the budget. This could initiate a long and painful dispute between Italy and the Commission. The tensions could lead to heightened market volatility and damage to the Italian economy. The political consequences could be far greater. 

Critics of the European Union see the Commission’s rejection of Italy’s budget as a serious violation of the country’s sovereignty. Supporters say it is justified, as previous Italian governments had agreed to a set of joint rules. It would be fair to object that politics in Italy have changed and the country’s relationship with the EU is changing accordingly. 

Both positions are short-sighted. Italy cannot expect to maintain its relative economic and social stability if the government maintains such a narrow-minded approach to economic policy. The problem with Italy’s budget is not that is disregards the EC’s targets. The problem is that the budget prioritises spending on measures that are highly unlikely to foster economic growth. These include pensions, a citizen’s income and a tax cut for the already well-off as well as an amnesty for unpaid taxes. 

How can the country expect to grow out of a debt and low growth and low productivity trap if it takes such a blinkered approach to economic policy? The same question would be relevant even if the country operated outside a political and monetary union such as the EU. In a hypothetical world where Italy was free from the constraints of the EU, the country would most likely have to devalue its currency to finance the deficit, with greater negative consequences for the economy. 

“Italy’s budget is not the hallmark of modern economic policy. It is a toxic mixture of measures”

Italy should have the right to spend more, and therefore bend the punishing EU rules, if the government was planning to spend on the correct items. These would be in areas such as education, infrastructure, childcare benefits and the modernisation of the bureaucracy. 

Let us agree that EU rules do not work for everyone and therefore they should be amended. 

But let us not forget that Italy’s budget is not the hallmark of modern economic policy. It is a toxic mixture of measures intended to please different parts of the electorate with no concern for long-term growth. 

Carlo Svaluto Moreolo, Senior Staff Writer
carlo.svaluto@ipe.com

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