The Chairman of the PBO, Giuseppe Pisauro, testified in a hearing (in Italian) before the joint Budget Committees of the Italian Senate and Chamber of Deputies as part of the consideration of the 2015 Economic and Financial Document. Pisauro discussed the results of the analysis conducted by the PBO of the macroeconomic scenario, developments in the public finances and compliance with fiscal rules.
The macroeconomic scenario
The PBO feels that the macroeconomic forecasts for 2015-2019 published in the Economic and Financial Document (EFD) are plausible overall and, therefore, in compliance with European and national rules, has validated the forecasts.
The official forecasts point to a recovery in 2015, with an acceleration in the pace of growth in subsequent years driven above all by favourable exogenous conditions (low oil prices and the depreciation of the euro). The growth outlook contained in the EFD is broadly consistent with that of the main independent forecasters interviewed by the PBO and with the projections of other national and international organisations. However, in the 2016-17 period, the EFD appears more optimistic than the forecasts of most of the PBO panel of forecasters. This reflects differences in views on developments in the determinants of the economic recovery: the EFD assigns a stronger impulse to domestic demand, while the PBO panel of forecasters expects greater impetus to come from exports.
At the same time, the risks to which the forecasts are exposed must not be overlooked, especially as regards the uncertainties in the international arena. The price of oil could begin to rise again owing to the geopolitical tensions affecting many producer countries. The scale and duration of the impact on the exchange rate and interest rates of the unconventional monetary policy instruments introduced by the ECB remain uncertain and will also depend on the monetary policy decisions of other areas, especially the United States. Developments in Greece add further concerns about instability to the outlook for the financial markets.
The public finances
The sharp improvement in the trend scenario for the public finances is essentially attributable to the reduction in interest expenditure and reflects a very small increase in primary spending (1.2%), in line with the previous five years but well below the growth seen in 2000-09 (4.3%).
The improvement in the public accounts has been used to forestall increases in VAT rates and the triggering of the other safeguard clauses. Taking account of the room for manoeuvre created by the so-called structural reforms clause and the correction announced in the EFD, those measures can only be entirely suspended in 2016, with partial deactivation in the subsequent years. In 2015, the larger reduction in interest expenditure will finance expansionary measures equal to 0.1 points of GDP.
The largest share of the budget measures (€7 billion) will be accounted for by the review of public spending. Achieving the spending target requires that previously approved measures generate all of the expected savings. It appears that additional savings can only be achieved through medium-term programs based on in-depth analysis.
Fiscal rules
The 2015 EFD confirms the objective of achieving structural balance in 2017. The Government’s decision to ask the European Commission to apply the structural reform clause for 2016 seems consistent with the intent to sustain the initial phase of the recovery when the effects of the structural reforms have not yet manifested themselves.
The decision to use the margin of 0.1 percentage points of GDP in 2015 raises concerns. The improvement in the structural balance would therefore be slightly smaller than that provided for under the rules on the adjustment path towards budget balance (0.2, as against 0.25). The issue is not so much a question of decimals as it is a question of the uncertainty of the forecast improvement in the 2015 accounts. Even a small increase in interest rates would eliminate that improvement and give rise to a deviation – almost certainly a significant one – from the adjustment path towards budget balance. At this time of the year – when the revenues that will be generated by self-assessed taxation are not yet known – it flies in the face of prudence to use resources, however small, as though they had already been received.
The preventive arm of the Stability and Growth Pact also establishes rules on spending growth and the reduction of the ratio of public debt to GDP. The spending rule would be breached in 2015, with a deviation close to the permitted margin of tolerance, underscoring the need for prudent decisions in 2015. Conversely, compliance with the rule in 2016 and 2017 would be complete.
The debt-rule is complied with on forward-looking basis as from 2016. The debt level that would be achieved under the public finance forecasts in 2018 would be exacting equal to that necessary to achieve a reduction in the ratio of 1/20th per year in the three previous years. Note that in order to achieve this it is not sufficient to reach budget balance (the medium-term objective) but rather to maintain a structural surplus in 2017 and 2018.