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A (Perfect) Case of Unnecessary, and Harmful Fiscal Consolidation: Italy’s Growth and Debt Since the 90s.

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Notes

  1. 1.

    See, e.g., Rossi and Toniolo (1996), European Commission (1999), European Commission (2014), Faini (2004), Toniolo and Visco (2004), Larch (2004), Faini and Sapir (2009), Bassanetti et al. (2014), Giordano et al. (2015), Pinelli et al. (2016), and Bugamelli et al. (2018).

  2. 2.

    See, e.g., the papers gathered in Teulings and Baldwin (2014) and the overview in Pagano and Sbracia (2014).

  3. 3.

    See, note 1.

  4. 4.

    Adding to the chart other countries, such as Japan or EU countries not belonging to the Eurozone, does not change the whole story. Therefore, they were not included only to avoid blurring the lines.

  5. 5.

    Notice that contrary to the US, the other Eurozone countries also experienced the double-dip recession of 2012–2013, but Italy’s downturn is deeper and longer.

  6. 6.

    This is the so-called hysteresis effect supported by several empirical studies ran after GFC; see, e.g., European Commission (2009), Ball (2014), Blanchard et al. (2015), Reifschneider et al. (2015), Stiglitz (2016), Fatás and Summers (2018), Engler and Tervala (2018), Anzoategui et al. (2019), and Tervala (2021).

  7. 7.

    Identical computations for the whole Euro Area (EU19) show a total loss of €1.76 \(\left ( 15.8\%\right ) \) and €2.05 \(\left ( 17.2\%\right ) \) trillion in 2014 and 2018, equal to the aggregate output of Italy, Greece, and Portugal or Spain, Ireland, Belgium, and Portugal. Losses of this magnitude swamp the damage done by even World War II and should be reported as the worst policy mistake of the last century. Similar estimates can be found, e.g., in IMF (2015), Stiglitz (2016), and Fatás and Summers (2018).

  8. 8.

    Over the same period, the primary balance-to-GDP ratio averaged: \(0.6\%\) in Germany, \(-1.0\%\) in France, \(-2.5\%\) in Japan, \(-1.3\%\) in the UK, \(-0.8\%\) in the USA.

  9. 9.

    Details on the computation of both CAPB_X, CAPB_EC, and STPB are in the next subsection.

  10. 10.

    The relevance of government size for analyzing the effects of fiscal policy on growth is found in a wide body of literature masterfully overviewed by Bergh and Henrekson (2011).

  11. 11.

    This means that the overall elasticity parameter is computed as a weighted sum of elementary elasticities, namely

    $$\displaystyle \begin{aligned} \eta _{R}=\mathop{\displaystyle \sum }\limits_{i=1}^{k}\eta _{R,i}\frac{R_{i}}{R},\eta _{G}=\mathop{\displaystyle \sum }\limits_{i=1}^{k}\eta _{G,i}\frac{G_{i}}{G}, \end{aligned}$$

    where \(\eta _{R,i}\) denotes the individual revenue elasticity (typically, personal income taxes, corporate income taxes, indirect taxes, social security contributions, non-tax revenue) and \(\eta _{G,i}\) the individual expenditure elasticity (typically, unemployment-related expenditure). A comprehensive review of the official methodology can be found in Mourre et al. (2013). See, also, Girouard and André (2005), and Price et al. (2015) for OECD Member States, and Fedelino et al. (2009) for IMF calculations.

  12. 12.

    Estimates of the \(\varepsilon \) parameter can be found in Girouard and André (2005), and Price et al. (2015) for OECD countries, and Mourre et al. (2013), and Price et al. (2014) for EU countries.

  13. 13.

    See, e.g., Girouard and Price (2004), Turner (2006), Morris and Schuknecht (2007), Joumard et al. (2008), and Guajardo et al. (2014).

  14. 14.

    Notice that since data on STPB provided by the EC (AMECO) database go back up to 1997, we set STB=CAPB_EC from 1996 to 1980. This is because no significant one-off operations are known to be present or detectable in the Italian budget policy over the 1980–1996 period (see, e.g., Momigliano and Rizza 2007; Rossi 2011).

  15. 15.

    See, e.g., Alesina and Perotti (1997), Alesina and Ardagna (1998, 2010, 2013), and Ardagna (2004, 2009). A detailed critical assessment of the Alesina and Perotti’s strategy to the CAPB is in Breuer (2017).

  16. 16.

    See, e.g., Darby and Melitz (2008), Furceri (2009), Del Granado et al. (2013), Coricelli and Fiorito (2013), and Çulha (2019).

  17. 17.

    The basic idea of this approach is that discretionary spending should be less persistent and more volatile than automatic expenditure. Coricelli and Fiorito (2013) test the new measure of discretionary government expenditure in a large panel of OECD countries (including Italy) over the period 1980–2011.

  18. 18.

    As suggested in the literature, estimating an equation of the form

    $$\displaystyle \begin{aligned} \Delta \ln (\mathfrak{X}_{t}/Y_{t}^{p})=c+\eta \Delta \ln \left( Y_{t}/Y_{t}^{p}\right) +\varepsilon _{t}, \end{aligned}$$

    where \(\mathfrak {X}_{t}\) is the variable of interest, we found a value for \( \eta _{GN}\) (t-statistics in parentheses) of \(-0.152\)\(\left ( 0.827\right ) \) and a value for \(\eta _{GD}\) of \(-0.128\)\(\left ( 0.241\right ) .\) Similar estimates are found, i.e., in Price et al. (2015). As an alternative, the opposite case where \(\eta _{GN}=1\) and implying

    $$\displaystyle \begin{aligned} CAPB\_X1_{t}=\frac{R_{t}}{Y_{t}}-\frac{GN_{t}}{Y_{t}}-\frac{GD_{t}}{Y_{t}} \left( 1-OG_{t}\right) \end{aligned}$$

    was also considered.

  19. 19.

    Another approach to measuring fiscal discretion is through the estimated residuals from feedback equations (e.g., Fatás and Mihov 2003; Afonso et al. 2010; Corsetti et al. 2012). However, approximating discretion via residuals has major drawbacks as unpredictability and discretion are not synonymous (Coricelli and Fiorito, 2013). In fact, discretionary interventions may react to economic conditions and be therefore state dependent.

  20. 20.

    Identical results for OECD countries are in Coricelli and Fiorito (2013). This feature also belongs to indicators relying on the narrative approach, which are highly correlated with those based on traditional methods. See Carrière-Swallow et al. (2021).

  21. 21.

    The results do not change if we use GDP growth as an alternative cyclical indicator, rather than the output gap.

  22. 22.

    The cumulative (integral) effect of FP changes is discussed in the next section.

  23. 23.

    Since the estimated equations imply regressing a stationary variable on both stationary and non-stationary variables, we also checked for potential spurious relationships by applying the ADF and PP unit root tests to residuals. The tests, available upon request, strongly rejected (p-value = \( 0.000\)) the null hypothesis of nonstationarity in the regression residuals. The alternative of including control variables in first differences turned out in a coefficient either statistically insignificant or of the wrong sign.

  24. 24.

    As stressed in the literature (e.g., Blanchard and Leigh 2013; Fatás and Summers 2018; Gechert et al. 2018; Carrière-Swallow et al. 2021), determining the integral (or cumulative) reaction of output to a cumulative fiscal shock over a given horizon is key to understanding the effects of fiscal policy, since these can either build or be reverted over time.

  25. 25.

    Following Alesina and Perotti (1995) and Alesina and Ardagna (2010), this complies with the measure of consolidation conventionally used in the literature.

  26. 26.

    Equation (5) builds in the interest-growth differential restriction \( \left ( r-g\right ) >0\), thus ensuring that the integral measuring \(VP_{t}\) is well defined.

  27. 27.

    The manifold theoretical and empirical advantages flowing from using the above sustainability indicator, including the key role played by the wealth structure (i.e., the proportions of productive capital and of financial wealth), are deeply discussed in Piersanti et al. (2023, Chap. 3).

  28. 28.

    A “dangerous debt obsession” (Blot, 2018; Krugman, 2019) and a “single-minded focus on government liabilities” (Stiglitz, 2016) are also the side effects of DGR. Such an obsession is visible, in the economics literature, in Reinhart and Rogoff (2010), Ghosh et al. (2012), Reinhart et al. (2015), Cottarelli (2016, 2017), Bernardini et al. (2019), and Kose et al. (2021) to name only a few; in international policy institutions, in the Fiscal Compact of the European Union, and in the emphasis given to public debt thresholds in debt sustainability assessment made by the IMF, the World Bank, and the OECD.

  29. 29.

    This is hardly understood, e.g., by Codogno and Galli (2017) and Bernardini et al. (2019), who using a standard Keynesian model where the intertemporal aspects of fiscal policy are simply ignored, still believe and want to show that running strong primary surpluses is the “only viable option” to reduce the public debt-to-GDP ratio.

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Authors and Affiliations

  1. Department of Communication Science, University of Teramo, Teramo, Italy

    Giovanni Piersanti

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  1. Giovanni Piersanti
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Correspondence to Giovanni Piersanti .

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  1. Department of Law and Economics, UnitelmaSapienza University of Rome, Rome, Italy

    Cesare Imbriani

  2. School of Finance and Management, SOAS University of London, London, UK

    Pasquale Scaramozzino

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Piersanti, G. (2023). A (Perfect) Case of Unnecessary, and Harmful Fiscal Consolidation: Italy’s Growth and Debt Since the 90s.. In: Imbriani, C., Scaramozzino, P. (eds) Economic Policy Frameworks Revisited. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-36518-8_8

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