The Italian government appears to be making plans to get to grips with the mounting burden of its debt. This is a move which is being widely welcomed. Under the latest plan, the deficit is forecast to be 2.7% in 2005, down from the 2004 target of 3.2% of GDP.
Without the changes, experts were suggesting the deficit could rise as high as 4.4% next year.
Apparently the only remaining tricky problem appears to be that of the promised tax cuts. Bloomberg today cites Bank Governor Antonio Fazio as joing the ranks of those questioning the viability of these cuts:
Bank of Italy Governor Antonio Fazio urged Prime Minister Silvio Berlusconi to focus on lowering debt and eliminating bureaucracy to boost economic growth rather than making tax cuts the country can’t afford.
Berlusconi’s government Thursday approved plans to cut taxes and adopt deficit reduction measures worth 24 billion euros ($29 billion) in 2005 to keep Italy’s budget from breaching European Union limits. The document didn’t say how 13 billion euros ($15.6 billion) in promised tax cuts for 2004 and 2005 would be funded.
As is not uncommon I have a different question: what will happen to economic growth in Italy if these cuts are implemented. Italy’s economy is projected by the IMF to grow at a rate of 1.2% this year. The previous two years were also extremely ‘lacklustre’. So the problem is that if you can only obtain a growth crawl when you are increasing the deficit, what are you likely to get when you start reducing.
Of course the attempts to get to grips with the problem – however inadequate they may be – are to be welcomed, but what will be the consequences? That is the uncomfortable question which noone seems to be facing up to at the moment.