OXFORD ECONOMICS by silvia nascetti

Impact of the economic measures proposed by Italian parties February 2013

A report for Corriere della Sera

Contents

Executive Summary.................................................................................. 3

Introduction ..................................................................................... 5

Measures proposed by the Italian parties...................................... 7 2.1 2.2 2.3 2.4 2.5

Simulation results ......................................................................... 11 3.1 3.2 3.3

Fare per Fermare il Declino ........................................................................ 7 Partito Democratico .................................................................................... 8 Popolo della Libertà .................................................................................... 8 Scelta Civica – Con Monti per l’Italia .......................................................... 9 Similarities between the proposed measures .......................................... 10

Input variables and OE assumptions........................................................ 11 Measures of the economic impact............................................................ 12 Results and comparison ........................................................................... 14

Conclusions ................................................................................... 18

Appendix ................................................................................................. 19

Executive Summary Background th

The election which will be held in Italy on February 24 and 25 2013 is likely to shape the prospects of the Italian economy for many years to come. Rising unemployment, high public debt and low competitiveness are only some of the challenges that the new government will face. The competing parties proposed different sets of policies to boost growth and employment while keeping the process of fiscal consolidation on track. Corriere della Sera, one of the most prominent newspapers in Italy, wanted to test the economic impact of the proposed measures with the help of an independent economic consulting company. Oxford Economics used its Global Economic Model to quantify the impact of proposed policies on the economy. The Global Economic Model of Oxford Economics is used by a large number of governments, supra-national institutions and central banks around the world. Aims The aim of this project is twofold: a) to compare the effects of proposed parties’ programs on Italy’s economy; b) to introduce an element of “Accountability” in the political environment, as it will establish a point of reference against which to check the future behaviour of parties in Parliament with the measures they declared they wanted to implement. The exercise proposed by Corriere della Sera is new and innovative in the Italian economic environment. It draws inspiration from another similar exercise produced for about 30 years by CPB (Central Planning Bureau) in the Netherlands. Study design A questionnaire including 20 questions was sent to the four parties that accepted the invitation to participate to this exercise: “Fare per Fermare il Declino”, “Partito Democratico”, “Popolo della Libertà” and “Scelta Civica – Con Monti per l’Italia”. The questions focused on the key policies that would be implemented by each party after winning the election. The answers provided by the parties have been converted into quantitative inputs for the Oxford Economic Global Model. Oxford Economics’ most recent forecasts for Italy (within the global economic context) have been used as a baseline for the simulations. Results The simulations run by Oxford Economics provide an accurate and unbiased estimate of the economic impact of the party programs. In particular, the impact of policies has been assessed and summarised in terms of GDP, unemployment rate, household disposable income, CPI inflation, budget deficit and public debt. Oxford Economics assumed a successful implementation of the policies of each party, despite the fact that implementation appears dependent on the political strength of the upcoming government. The simulations showed the strengths and weaknesses of each party’s program. The current situation of the Italian economy does not leave room for parties to propose radically different programmes. The path for improving growth (and

potential output) within the constraints imposed by the need to bring the huge debt to GDP ratio under control is rather narrow. However, parties proposed programs incorporating significant differences both in the measures and in the timing of their implementation. Major differences can indeed be found in the overall size of their intervention on taxes and expenditures, as well as in the size of their reliance on the sale of public assets (which they all plan for). They also differ in their vision to prioritise different measures and sectors of the economy (private and/or public investment, employment and labour market, workers’ incomes, subsidies, training, innovation, etc.). Some similarities nonetheless appear: none of the four parties indicated that Italy should leave the Euro nor that the Fiscal Compact should be renegotiated. All parties chose the reform of the tax system as well as the revision of central government expenditure as priorities for their activity in the next legislature. All party programs intend to fund tax cuts with expenditure cuts, although they vary in size. There are however, some risks that some of the individual measures included in the programs will not yield the amounts expected by the party. The largest of such risks is for the revenues expected from privatisation in the PdL program. Party programs positively impact in varying degrees on GDP, unemployment, household income and debt. The program of “Popolo della Libertà” results in larger increases in GDP and employment, although at the expense of the public deficit. The party programs which contain more prudent fiscal budgets and are more oriented towards reducing taxes to households result in faster fiscal consolidation. To the extent that they rely less on uncertain revenues from asset sales, the financing of these programs is also more secure. This is the case for the programs of “Partito Democratico” and “Scelta Civica – Con Monti per l’Italia” while “Fare per Fermare il Declino” appears to be in an intermediate position.

1 Introduction The election which will be held in Italy in February 2013 is likely to shape the prospects of the Italian economy for many years to come. Rising unemployment, high public debt and low competitiveness are only some of the challenges that the new government will face. The competing parties proposed different sets of policies to boost growth and employment while maintaining the process of fiscal consolidation on track. Corriere della Sera (CdS), one of the most prominent newspapers in Italy, wanted to test the economic impact of the proposed measures with the help of an independent economic consulting company. Oxford Economics (OE) used its Global Economic Model to quantify the impact of proposed policies on the economy. The aim of CdS is twofold: a) to compare the effects of proposed parties’ programs on the country’s economy; b) to introduce an element of “Accountability” in the political environment, as it will allow to check the future behaviour of parties in Parliament against the measures they declared they wanted to implement. The exercise proposed by CdS is new and innovative in the Italian economic environment. It draws inspiration from another similar exercise produced for about 30 years by CPB (Central Planning Bureau) in the Netherlands. This study presents the results of the analysis carried out by OE on behalf of CdS. The work phases, which involved a constant cooperation between the two companies, were: 

Invitations and questionnaires: a questionnaire including 20 questions was sent to the four parties that accepted the CdS’s invitation to participate to this exercise: o

“Fare per Fermare il Declino” (Fare)

“Partito Democratico” (PD)

“Popolo della Libertà” (PdL)

“Scelta Civica – Con Monti per l’Italia” (SC)

The questions focused on the key policies that would be implemented by each party after winning the election and have been published by CdS on 18 January, seeking quantified answers about the size of the proposed policies. The questions are publicly available on the CdS website and can be grouped into:

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Definition of priorities

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Tax measures

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Public expenditure measures

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Eurozone policies

Data collection and meetings: All parties provided answers to all 20 questions, with a varying degree of detail about the size of the measures mentioned in the program. Whenever OE believed the information provided was not sufficient or not clear, it contacted the parties to obtain a clarification or a correction.

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Simulation: The answers provided by the parties have been converted into quantitative inputs for the OE model. In particular, OE did not make any assumption regarding the values used in the simulations – except for PD, which only supplied limited data. Solving the model with these inputs provides quantitative estimates of the parties’ programs on the Italian economy. Details on the methodology are provided in section 3.

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Analysis of the results: The impact of policies is assessed in terms of GDP, unemployment rate, household disposable income, CPI inflation, budget deficit and public debt – and described in this report.

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Report: OE prepared a report for CdS summarising the key policies implemented in the model for each party, the methodology used for the simulations and the results.

The OE Global Economic Model (GEM) was used for the simulation of the parties’ programs. The GEM includes detailed models for 46 countries and headline models for 33 countries aggregated in 6 trading blocks to account for the rest of the world. In particular, the Italian econometric model is very detailed, with more than 600 variables. Being part of the OE Global Model, simulations on the Italian model include feedback effects from the rest of the world. For example, a rise in growth of the Italian economy would have a positive impact on Italy’s trading partners, which in turn would further improve economic conditions in Italy. Further details on the model can be found on www.oxfordeconomics.com. For further information on Oxford Economics and its GEM, please contact Emilio Rossi at erossi@oxfordeconomics.com or Fabio Ortolani at fortolani@oxfordeconomics.com. The layout of the rest of the study is as follows. Section 2 describes the parties’ programs, with a focus on the key policies that are expected to have a more significant impact on the Italian economy in the simulation. Section 3 describes in detail the methodology adopted for implementing the policies in the Italian econometric model, the assumptions used and the simulation results. Section 4 concludes.

2 Measures proposed by the Italian parties This section introduces our analysis of the parties’ economic programs. As mentioned in the previous section, the key policies for each party have been extrapolated from the answers to the questionnaires and successive meetings with party representatives. OE did not make any assumption regarding the values used in the simulations – the figures mentioned in this section reflect the information made available by parties to OE at the time the simulations were run. OE made assumptions on the size of the fiscal measures in the case of the PD policies, complementing the information contained in the answers to the questionnaires with figures from newspaper articles and other sources. Only the policies relevant for the simulations are discussed in this section, as parties’ answers have already been published by CdS on their website in exhaustive articles over the period ahead of the election. Sections 2.1 to 2.4 are devoted to the description of the key fiscal policies proposed by “Fare per Fermare il Declino”, “Partito Democratico”, “Popolo della Libertà” and “Scelta Civica – Con Monti per l’Italia” respectively. While Rivoluzione Civile did not supply CdS with enough information to extrapolate a fully comprehensive economic policy program, Movimento 5 Stelle (M5S) made reference to its program as published on their website. Also in this latter case, the information available was not sufficient to quantify the M5S economic measures.

2.1

Fare per Fermare il Declino

The three key priorities indicated by “Fare per Fermare il declino” are: raising GDP growth, revising central government expenditure and reforming the tax system. In particular, Fare aims to reduce the fiscal burden by 5% points of GDP in five years through several specific measures. Firstly, companies would experience a reduction of taxation as the regional corporate tax – Irap – would be gradually abolished. Additional €11 billion of savings for companies would result from a reduction of social contributions in the second half of the legislature. Meanwhile, households would experience a reduction of both direct and indirect taxes. The income tax would be reduced, with the tax rate on the poorest half of households cut to zero. As a result, income tax revenues are expected to shrink by 20% at the end of the legislature. Moreover, the VAT tax hike from 21% to 22% expected in July 2012 would be avoided. Fare aims to reduce total government expenditure by 6% of GDP in five years. 1% point would derive from lower interest payments, as the party expects to cut government debt by €200 billion by the end of the legislature by selling public assets from 2014. The residual adjustment (5% of GDP in 2017) would result from a broad set of measures, to be implemented progressively. In particular, a further revision of the pension system would generate savings for €35 billion at the end of the legislature. Government subsidies would be slashed in the first two years of the legislature. The residual adjustment would come from a reduction of administrative costs. Fare proposes measures against unemployment and aimed at improving professional training in the second half of the legislature. Meanwhile, public investment growth would be maintained in line with GDP growth.

2.2

Partito Democratico

The “Partito Democratico” (PD) has listed a number of targets for the next legislature, not restricting the choice to three key targets as proposed in the OE questionnaire, e.g. increase GDP growth, improve the competitiveness of the Italian economy, increase employment, reduce tax evasion and reform the tax system. The PD has not provided a full quantitative analysis of its proposed measures. As a result, OE has integrated the information available from the party’s answers with available figures from newspaper articles and other sources. The PD aims to reduce taxation on households by cutting the lowest income tax rate to 20% from 23%, as part of an overall package worth approximately €30 billion. The income tax measure is estimated to cost €12bn. Moreover, a remodulation of the property tax would imply a reduction of the tax on poorer households at the expense of richer households. As the measure is expected to be at zero cost for the state, OE has not changed the overall revenues generated by the property tax. Finally, the VAT hike from 21% to 22% in July 2013 would be avoided while the VAT tax on excise taxes on fuel would be “sterilised”. Meanwhile, companies would see taxes reduced through an increase of deductions on taxes on reinvested earnings. Lower revenues from tax cuts would be covered by lower government expenditure and reinforcing the fight to tax evasion. The former has been split equally between lower transfers and lower government consumption, while fighting tax evasion is assumed to bring in additional revenues for €6 billion in 2017. OE also added a prudent estimate of the public debt cut achieved through sales of public assets in order to make the simulation consistent with those of the other parties. In particular, the cut is expected to start in 2014 and amount to €80 billion in 2017.

2.3

Popolo della Libertà

The “Popolo della Libertà” (PdL) party’s three priorities are to increase GDP growth, revise central government expenditure and reform the tax system. The targets would be reached by reducing the fiscal burden by 5% points in 2017. In particular, the fiscal burden would be reduced by 1 percentage point per year split equally between firms and households. A fiscal reform would reduce the current income tax brackets and rates to two – a rate of 23% on income up to €43,000 and 33% on income above €43,000. Revenues from income taxes are expected to drop €22 billion as a result. The PdL would also eliminate the property tax (IMU) on first residences and return the IMU paid on first residences in 2012 to households. Finally, households would not experience a rise in the VAT rise from 21% to 22% in July 2012. Companies would also experience a decline of taxation. In particular, the PdL would gradually abolish the regional corporate tax – Irap. The cost of this measure is estimated by the PdL at €34 billion. The fiscal wedge would be reduced by cutting contributions for a total of €12 billion by 2018. The reduction of taxes would be accompanied by savings on the expenditure side and additional revenues from fighting tax evasion. In particular, government expenditure would be cut through a reorganization of tax expenditures

(deductions, exemptions, etc.) which would result in savings for €30 billion in 2018. Reinforcing the fight to tax evasion would generate additional revenues for €10 billion between 2013 and 2018. The remaining savings are expected to come from a reduction of interest payments due to a significant cut of government debt. In particular, fiscal agreements with Switzerland and the sale of public assets are expected to allow debt to be cut by €400 billion in 2018. The fiscal agreement with Switzerland is expected to bring in revenues for €40 billion in 2013-2014, and €5bn per year thereafter, which would be partly used to expand investment during the legislature. The sale of €400bn of public assets is a key point of the PdL program, since it is from this measure and its positive impact on financial markets that PdL expects a reduction in interest rates by 1% per year, or €16bn of resources per year to be devoted to tax cuts. It is to be noted that the disposal of €400bn appears to be technically very difficult to achieve within the five years of the legislature. In the seventeen year period 1994-2010 (which included many years of more optimistic financial markets than today), Italy managed to dispose off public assets by less than €100bn, according to a paper released by the Ministry of Economy and Finance in 2010. Moreover, the PdL program outlines that about €230-240bn (about two thirds of the total €400bn) will be obtained by establishing a new financial company charged with selling specific public assets. Whether this financial company would be considered within or outside the perimeter of government debt (and therefore whether it would abate Italian debt or not) would be subject of scrutiny and of possible unfavourable decision by Eurostat while financial markets’ reaction would have to be verified.

2.4

Scelta Civica – Con Monti per l’Italia

The main targets of the party “Scelta Civica – Con Monti per l’Italia” (SC) are to increase employment, revise central government expenditure and reform the tax system. In particular, SC aims to reduce the fiscal burden by 3% points in 2017 through various measures affecting both households and companies. The former would experience a reduction of income taxes of 2% points of GDP by 2017. Moreover, tax deductions on the property tax – IMU – would be increased by up to €2.5 billion by 2017. Companies would also experience a lower level of taxation by the end of the legislature. In particular, corporate taxes would be reduced by almost 1% of GDP in 2017, according to SC plans. Moreover, the party aims to boost private investment by introducing tax deductions for innovative companies. This measure is expected to add 0.1% point to the reduction of corporate tax revenues as percentage of GDP. Government expenditure (excluding interest payments) as percentage of GDP would be cut by 4 percentage points in 2017. Half of the adjustment in government consumption is expected to take place through a reduction of prices, although this will also generate lower revenues for companies providing goods and services to the public sector. Meanwhile, additional efforts to fight tax evasion will add €360 million of revenues in 2013 – with the annual increment seen rising to €445mn in 2017. Finally, SC expects to cut government debt by €130 billion by the end of the legislature through the sale of public assets SC also aims to increase the ratio of public investment to GDP by 0.8 percentage points by 2017, in order to boost growth and employment.

2.5

Similarities between the proposed measures

The party programs have many differences, but also share some similarities. In particular, all parties expect a significant reduction of public debt from asset sales, albeit of very different size. The PdL expects the larger debt cut which, at €400 billion, would bring public debt below 100% of GDP at the end of the legislature. On the expenditure side, this implies a reduction of interest payments, with more resources available for fiscal stimulus. Another similarity can be found where both SC and PdL explicitly mention increasing government investment to boost employment and output. Fare stressed resources will be allocated to protect unemployed people and improve professional training. On the revenues side, Fare, PD and PdL propose the cancellation of the VAT hike in July 2013 as a measure to stimulate consumer spending through a lower level of prices. Moreover, all parties are willing to reduce the weight of the property tax on poorer households, either by eliminating the tax on primary residences – as in the PdL programm – or by planning tax deductions or a re-modulation of the tax. Finally, most parties – with the exception of the PD – want to reduce taxations on firms, with both the PdL and Fare aiming to abolish the Irap regional business tax. These similarities show some agreement among the parties on which policies would be necessary to support the recovery of the Italian economy in the coming quarters.

3 Simulation results This section summarises the simulation results obtained by implementing the party policies in the OE Global Economic Model (GEM). The main objective of the analysis is the comparison across parties’ programs of their impact on the Italian economy over a medium-term time horizon. Section 3.1 summarises the key features of the macroeconomic model for Italy and in particular how fiscal policy measures affect the economy. Section 3.2 describes the variables and tables used to summarise the output and the OE baseline forecast. Section 3.3 illustrates the results and compares the outcome of the different simulations.

3.1

Input variables and OE assumptions

OE’s GEM includes a detailed model of the Italian economy. In particular, fiscal variables such as government current spending or income tax feed through the rest of the economy. Their level therefore determines the economic environment as reflected in GDP growth, employment or inflation. For instance, a reduction in income tax rates has an immediate positive effect on households’ disposable income. In turn, this boosts private consumption, which leads to higher employment. If not matched by increased supply, increased demand in the economy raises inflationary pressures. Moreover, a rise in consumption also raises demand for foreign goods. The rise in imports leads to a worsening of the external balance. Another example relates to taxes on labour. A reduction in employers’ social security contributions lowers the cost of labour, which encourages firms to hire. Higher employment boosts incomes and consumption and economic activity in general.

The key fiscal levers that have been used to quantify the impact of the parties’ proposals are the following: 

On the revenue side, the main variables are: direct and indirect taxes, employee social security contribution, corporate tax and payroll tax.

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On the expenditure side, the main variables are: government consumption and investment and government transfers.

OE revises its forecasts on a monthly basis. The January 2013 forecast was used as a baseline for the simulations of parties’ programs (henceforth “the baseline”). According to OE assumptions, world GDP growth rises slightly from 2.3% in 2013 to 2.4% in 2014, with a pick up in the medium term to 3.5% pa between 2015 and 2018. GDP growth in the US also accelerates from 2.3% in 2013 to just above 3% in 2014 and remains close to 3% in the medium term. Growth in the Eurozone as a whole is negative in 2013, at -0.2%, but a gradual turnaround from 2013H2 results in growth rising to 1.1% in 2014. Tight fiscal and credit conditions, high unemployment and private sector deleveraging keep GDP growth in the Eurozone well below the US in the medium term, at around 1.5% pa between 2015 and 2018. The Italian economy underperforms the rest of the Eurozone, with GDP falling 1.2% in 2013 and rising a modest 0.3% in 2014%. Medium-term growth remains at 1.2% pa on average in 2015-2018. GDP drops in the short term as domestic demand is depressed by fiscal austerity and tight credit conditions. Moreover, consumption is held back by high unemployment, which is expected to continue to rise until 2014, when it peaks at 12.6%. Fiscal consolidation implies the budget deficit is seen falling steadily in the next years. As a result, public debt starts to decline from 2015. When running the simulations, OE assumed that the European Central Bank does not respond to the fiscal policies in Italy in order to make the results independent of possible changes in the monetary policy. Similarly, the euro exchange rate has been kept exogenous, in order to reflect only domestic sources of changes in competitiveness. Oxford Economics assumed all policies would be implemented successfully and as reported by the parties in their programs. Risks related to the technical implementation of the measures and other problems are highlighted in the section 3.2 and 3.2.

3.2

Measures of the economic impact

The results have been summarised using the key economic metrics identified by CdS. This set of variables best summarises the impact of the policies on households, firms and public finances. Table 3.1 shows the level of the variables under the different policy assumptions. The values are computed starting from the OE forecast for Italy and the differences result from the impact of the policy measures described in section 2. In particular, table 3.2 shows the same list of indicators expressed as differences from the OE forecast. Depending on the variable, the difference is expressed in percentage terms or levels, as explained in more detail in the next paragraph.

The variables are:

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Real GDP: gross domestic product (GDP) is a measure of the economic activity in the country. In particular, nominal GDP measures the value of all of goods and services produced by the economy. The impact of changes in prices is eliminated when estimating the real GDP. The figure in Table 3.1 shows the growth rate of real GDP while table 3.2 measures the percentage difference of the variable with respect to the OE forecast in each simulation.

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Unemployment rate: the variable measures the number of people of working age that is not employed but is actively looking for a job as a percentage of the workforce. A high level of the unemployment rate implies that more people fail to find a job as the economic activity is shrinking or depressed. The value in table 3.1 shows the level of the unemployment rate while the value in table 3.2 measures the difference between the rate under the various programs and the baseline in percentage points.

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Household income: household income comes mainly from wages, salaries, interest receipts and government transfers. Disposable income is obtained subtracting taxes from total household income, while real disposable income is computed by eliminating the effect of changes in prices. Real household disposable income measures the resources available to households for consumption. The figure for household income in table 3.1 is the growth rate of real household disposable income while table 3.2 shows the percentage difference from baseline.

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CPI inflation: inflation describes the phenomenon of rising prices within an economy. In particular, CPI inflation measures the change in prices of consumer goods. A strong rise in inflation reduces households’ purchasing power and depresses consumption. An increase in the VAT rate has a direct impact on consumer good prices and inflation. The figure in table 3.1 shows the inflation rate in each of the simulations while table 3.2 shows the percentage change in the level of the consumer price index with respect to the OE forecast.

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Government balance: a government budget deficit occurs in any year when government revenues are lower than expenditures. A larger deficit implies a faster accumulation of debt, often accompanied by higher interest rates paid by the government to refinance its debt. This, in turn, affects the interest rates at which companies and households can borrow, with a negative impact on consumption and investment. The value in table 3.1 shows the deficit of the Italian general government expressed as percentage of GDP while the figure in table 3.2 measures the difference of the deficit under the various programs and the baseline expressed as percentage of GDP.

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Government debt: government debt measures the outstanding borrowing of the public sector and results from the accumulation of past deficits. A high level of debt – Italy is second only to Greece in the Eurozone – implies large interest payments, which reduce available resources for government consumption and investment. Moreover, it increases the perceived risk of default of the government, which is

reflected in the risk premium on government bond yields. The figure in table 3.1 shows the level of public debt expressed as percentage of GDP while table 3.2 measures the difference of debt under the various programs and the OE forecast expressed as percentage of GDP.

3.3

Results and comparison

This section aims at providing an explanation of the economic impact of the different party programs shown in tables 3.1 and 3.2 in the Appendix and a comparison of the results, highlighting possible strengths and weaknesses in the policy assumptions. The key results for each party are:

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Fare per Fermare il Declino: Fare’s program results in a significant improvement in GDP in the medium term. In particular, GDP is up by 1.1% (€16bn at today’s prices) with respect to OE’s forecast in 2018. The cuts in taxes on companies boost production and allow unemployment to drop by 0.8% points in 2018. This, together with lower taxes on income, supports household disposable income and consumption. Moreover, the abolition of the planned VAT hike in July 2013 reduces price level around 3.5% lower than baseline in 2018 – the OE baseline assumes that the VAT hike occurs. The government deficit widens slightly as a result of the cuts in taxes, although the impact of the measures on public finances is mitigated by the rise in economic activity that generates extra revenues and lowers social spending needs. By 2018, the deficit is 0.2% point wider than in the baseline. Finally, public debt as percentage of GDP drops 8.6% points due to revenues from sales of public assets.

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Partito democratico: With little quantitative detail provided by PD, OE had to quantify most of their answers. The simulation captures the key implications of the size and the distribution of the fiscal package proposed by the PD. Firstly, the policies appear to have a positive impact on GDP in the medium term, as the level of output is 0.4% (€6bn at today’s prices) higher in the simulation than in the baseline in 2018. However, the rise in GDP is not sufficient to trigger a significant reduction of unemployment, which is down only 0.1 percentage point compared with the OE forecast in 2018. Disposable income rises almost 1% with respect to baseline as a result of the planned income tax rate cut from 23% to 20%. Moreover, as the planned VAT hike is cancelled, the level of consumer prices is 1.9% below baseline by 2018. The balanced budget nature of the measures combined with somewhat higher economic activity means that the government deficit improves slightly, by 0.2 percentage points of GDP below the baseline in 2018. Debt falls by 3.5 percentage points of GDP under the PD program, from asset sales.



Popolo della Libertà: The PdL program has a very positive impact on GDP. In particular, the initial boost to GDP is stronger than in the other simulations as a result of the large stimulus package, which is funded by a one-off fiscal arrangement with Switzerland. GDP is 1.8% (€26bn at

today’s prices) above baseline in 2018, while unemployment falls 1.5 percentage points with respect to the OE forecast, i.e. more than in all other simulations. Household disposable income rises by less than in Fare and Monti simulations – by 1.5% with respect to baseline in 2018 – as the reduction in income taxes is relatively smaller. Moreover, GDP growth falls below baseline in 2018, at 1.2%, partly because of fading effects from higher investment. The fiscal balance deteriorates compared to the OE baseline. In particular, the government deficit begins to widen in 2015, rising above 3% of GDP again in 2016. As a result, debt remains above 100% of GDP in 2018. 

Scelta Civica – Con Monti per l’Italia: SC’s program results in a lower increase in GDP in the long term than in the Fare and the PdL simulations. Indeed, the cuts in government consumption imply a slight deterioration of GDP in 2013-2014. However, GDP accelerates from 2015 and is 0.8% (€12bn at today’s prices) above baseline in 2018. As a result, unemployment drops 0.3 points below baseline in 2018. The significant reduction of the income tax results in a 2.2% rise of real household income with respect to baseline. Prices fall less than under any other program because of the VAT hike in 2013 – which is also assumed in the OE baseline. The government deficit improves from 2013 and narrows by 0.5% of GDP in 2018. This, combined with revenues from sales of public assets, reduces public debt by almost 9% of GDP in 2018.

The differences between the simulation results derive from the different size and composition of the fiscal packages proposed by the parties. In particular, real GDP is directly affected by changes in government consumption and investment. Moreover, employment is positively affected by the level of economic activity and changes to payroll taxes and social security contributions that affect the cost of and hence demand for labour. Finally, the dynamics of fiscal deficit and public debt depend on the balance between the proposed cuts in revenues and expenditures, as well as interest rates. Overall, all simulations resulted in a positive impact of the measures on GDP. As already pointed out, OE assumed the party programs would be implemented successfully when running the simulations. On the contrary, the OE baseline forecast reflects more prudent assumptions, which results in a more negative outlook for the Italian economy in the next few years. We summarise the key differences in their economic impacts in the next paragraphs: 

Household consumption depends on disposable income, which in turn is affected by wages, employment, income tax rates, government transfers and inflation. As a result, the party programs that reduce indirect (VAT) or direct taxation on households’ disposable incomes by more and cut government transfers by less will have a more positive impact on households’ purchasing power and spending. This is the case for the Fare and SC programs, for which the net reduction in direct taxes compared to the OE baseline is estimated at around 2% of GDP in 2018. Moreover, the fact that the Fare program exclude a VAT hike, accounts for the fact that households’ incomes rise more strongly (+2.9% in 2018) than under the SC program (+2.2%). The absence of a

VAT hike in 2013 also contributes to the relatively large increase in household income in the PD simulation in spite of the smallest reduction in income taxes – estimated at less than 1% of GDP in 2018.



The stimulus provided to firms is essential for the economy, as it supports production and employment. As a result, cuts to corporate taxes and measures aimed at reducing the cost of labour have a significant impact on growth. The PdL proposed significant cuts to corporate taxes, estimated at around 1.5% of GDP - net of other measures – in 2018. It also proposes a reduction of the tax wedge, which contributes to an increase in potential output. These measures allow unemployment to fall the most in the PdL simulation and output to rise significantly. The Fare program also contains a reduction of corporate taxes and the tax wedge, which result in significantly lower unemployment with respect to baseline. SC and PD measures are smaller in size and their impact on unemployment and GDP growth is reduced as a result.



Similarly, the stimulus from higher government investment has a positive impact on growth. Typically, a rise in government investment worth 1% of GDP will raise overall GDP by slightly more than 1%. The SC’s program aims to rise government investment by 0.8% point of GDP by 2018. This explains higher GDP in the SC simulation compared to PD – OE assumed government investment remains at the baseline level in the PD simulation.

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Competitiveness gains can result from a reduction of taxation on wages and the drop in prices that follows a reduction of the VAT rate. The results show that the party programs that are more focused on cuts to corporate taxes, the tax wedge and VAT boost competitiveness the most. In particular, we find that the improvement in competitiveness is accounts for most of the additional positive impact on GDP of the PdL program compared to the SC program, while without this competitiveness channel the impact of the Fare program drops somewhat below that of the SC program.

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Government consumption is one of the components of GDP. As a result, cuts to government consumption have an immediate impact on GDP and programs that have larger expenditure cuts show a lower relative level of output. SC cuts to government consumption are estimated at around 1.5% of GDP in 2018 – net of other measures. Fare also has similar – but slightly smaller – cuts in government consumption, while OE estimated cuts of less than 1% of GDP in 2018 in the PD program. The PdL does not mention explicitly reducing government consumption in its program. Cuts to government expenditure contribute to explain the differences in the level of output in the medium term, with GDP in the SC and Fare simulations remaining below the level attained under the PdL program until 2018.



Fiscal sustainability is key for any fiscal package, as it determines the dynamics of fiscal balances that are closely watched by foreign institutions and investors. Unsustainable programs are likely to lead to sharp increases in bond yields which raise the cost of debt and threaten the ability by the government to continue with the planned program. The

results show wide differences between the party programs. In particular, the PD and SC programs appear more balanced, with government balance improving with respect to the baseline. On the contrary, the Fare program results in a slight deterioration of the budget deficit in the medium term. The difference is explained by the fact that the relative reduction of expenditures in the Fare program (6 percentage points of GDP compared to a 5 percentage points drop in revenues) is smaller than in the SC program (4 percentage points of GDP compared to a 3 percentage points drop in revenues). Moreover, the larger drop in prices implied by the Fare program affects nominal revenues from the consumption tax. The PdL program results in a significant deterioration of the government balance, in spite of the marked increase of GDP. The party expects a significant drop in interest rates from the large cut of government debt to below 100% of GDP (ex-ante) in 2018. Problems related to the feasibility of such a large cut in debt have been pointed out in section 2.3. These problems could raise investors’ concerns about the sustainability of Italian debt and result in higher interest rates. We find that bond yields are unlikely to fall by as much as assumed in the program. Moreover, the €30 billion reduction in “tax expenditures” (transfers, subsidies, etc.) is not sufficient to offset the effect of lower revenues. As a result, the government deficit rises above 3% of GDP in 2016 and government debt fails to drop below 100% of GDP. GDP growth also begins to suffer in the medium term, falling below baseline in 2018. 

Asset sales – Reduction in government debt are to be achieved partly from the sale of public assets. The PdL, and to a (much) lesser extent the Fare, programs are particularly reliant on this. Whilst privatisations or more general sale of assets can indeed bring additional revenues quickly and make economic sense if a company or sector would be better run in the private sector, how much revenue can be generated from such sales is uncertain. Buyers may not be found or they may not be willing to offer the prices assumed in the party programs. If revenues from asset sales cannot be generated to the extent assumed in the programs, the sustainability of these programs would be jeopardised.

The simulations showed that each party program has its own strengths and weaknesses. More pro-growth and pro-businesses programs are expected to bring a larger increase in output and employment. On the contrary, smaller and more austere programs are expected to result in a smaller positive impact on GDP but also faster fiscal consolidation.

4 Conclusions The aim of this exercise was to compare the effects of proposed parties’ programs on the Italian economy ahead of the February elections. Oxford Economics ran simulations of the party programs on behalf of Corriere della Sera using its well-known Global Economic Model. Oxford Economics’ forecasts have been used as a baseline for the simulations. The impact of policies has been assessed in terms of GDP, unemployment rate, household disposable income, CPI inflation, budget deficit and public debt. The report described the transmission mechanism that led to the results observed in the simulations for the key economic variables and identified strengths and weaknesses of the each party program. The party programs that are more oriented towards supporting businesses and investment have a stronger positive impact on the level of output of the economy and employment, although at the expense of the public deficit. This was the case for the programs of “Popolo della Libertà” (with the caveat related to privatisation revenues), and to a lesser extent of “Fare per Fermare il Declino” (whose public deficit remained in line with the OE baseline). The party programs which contain more prudent fiscal budgets and are more oriented towards reducing taxes to households result in a faster fiscal consolidation. To the extent that they rely less on uncertain revenues from asset sales, the financing of these programs is also more secure. This was the case for the programs of “Partito Democratico” and “Scelta Civica – Con Monti per l’Italia”. The report also described some of the risks that could interfere with the implementation of the programs.

Appendix

Table 3.1: simulation results (growth rates and levels) Fare per Fermare il Declino Real GDP - % change Unemployment rate - % Household income - % change CPI Inflation - % change Government balance - % of GDP Government debt - % of GDP Partito Democratico Real GDP - % change Unemployment rate - % Household income - % change CPI Inflation - % change Government balance - % of GDP Government debt - % of GDP Popolo della LibertĂ Real GDP - % change Unemployment rate - % Household income - % change CPI Inflation - % change Government balance - % of GDP Government debt - % of GDP Scelta Civica - Con Monti per l'Italia Real GDP - % change Unemployment rate - % Household income - % change CPI Inflation - % change Government balance - % of GDP Government debt - % of GDP

2013

2014

2015

2016

2017

2018

-1.1 12.5 -3.2 2.2 -2.3 126.4

0.4 12.6 0.4 1.2 -1.7 125.6

1.0 12.1 0.7 0.8 -1.8 122.0

1.5 11.5 1.6 0.7 -2.0 118.1

1.5 10.7 2.2 0.4 -1.5 115.2

1.9 9.9 2.3 0.3 -1.5 112.4

-1.4 12.6 -3.5 2.1 -2.2 126.5

0.4 12.7 0.5 1.1 -1.9 126.0

1.1 12.2 0.9 0.8 -1.8 124.3

1.4 11.7 1.0 0.9 -1.5 121.9

1.4 11.1 1.5 1.1 -1.3 119.2

1.4 10.6 1.5 1.3 -1.1 117.4

-0.8 12.4 -2.6 2.1 -2.7 125.2

0.6 12.2 -0.5 1.0 -1.7 120.4

1.4 11.4 1.2 0.5 -2.4 114.4

1.7 10.6 1.6 0.7 -3.2 108.7

1.7 9.9 1.6 1.0 -3.4 103.4

1.2 9.2 0.8 1.4 -3.0 104.1

-1.4 12.6 -3.7 2.3 -1.9 125.7

0.4 12.7 0.3 1.7 -1.7 124.7

1.3 12.2 1.5 0.9 -1.5 121.5

1.4 11.6 1.6 1.0 -1.4 118.0

1.6 11.0 2.0 1.1 -1.1 114.2

1.5 10.4 1.5 1.2 -0.8 112.1

Table 3.2: impact of policies (differences with respect to baseline) Fare per Fermare il Declino Real GDP - % difference Unemployment rate - level difference Household income - % difference CPI Inflation - % difference Government balance* - level difference Government debt - level difference Partito Democratico Real GDP - % difference Unemployment rate - level difference Household income - % difference CPI Inflation - % difference Government balance* - level difference Government debt - level difference Popolo della LibertĂ Real GDP - % difference Unemployment rate - level difference Household income - % difference CPI Inflation - % difference Government balance* - level difference Government debt - level difference Scelta Civica - Con Monti per l'Italia Real GDP - % difference Unemployment rate - level difference Household income - % difference CPI Inflation - % difference Government balance* - level difference Government debt - level difference

2013

2014

2015

2016

2017

2018

0.1 0.0 0.3 -0.2 -0.1 0.0

0.1 -0.1 0.7 -0.7 0.2 -1.3

0.0 -0.1 0.5 -1.0 0.0 -4.0

0.3 -0.2 1.2 -1.6 -0.4 -6.5

0.5 -0.5 2.1 -2.5 0.0 -7.7

1.1 -0.8 2.9 -3.6 -0.2 -8.6

-0.2 0.1 -0.1 -0.2 -0.1 0.1

-0.1 0.1 0.5 -0.9 0.0 -0.9

0.0 0.0 0.6 -1.2 0.0 -1.7

0.1 0.0 0.7 -1.5 0.1 -2.7

0.3 -0.1 0.9 -1.7 0.1 -3.7

0.4 -0.1 0.9 -1.9 0.2 -3.6

0.3 -0.1 0.9 -0.2 -0.5 -1.2

0.6 -0.5 0.4 -0.9 0.2 -6.5

1.0 -0.8 0.7 -1.5 -0.6 -11.6

1.5 -1.1 1.5 -2.1 -1.6 -15.9

1.9 -1.3 1.8 -2.5 -2.0 -19.5

1.8 -1.5 1.1 -2.5 -1.7 -17.0

-0.2 0.1 -0.2 0.0 0.3 -0.6

-0.1 0.1 0.1 -0.1 0.2 -2.2

0.2 0.0 0.8 -0.3 0.3 -4.5

0.4 -0.1 1.5 -0.5 0.3 -6.6

0.6 -0.2 2.2 -0.7 0.4 -8.7

0.8 -0.3 2.2 -0.9 0.5 -8.9

* A positive number implies an improvement of the government balance

Italy: real GDP

Italy: unemployment rate

â&#x201A;Ź billion - 2005 prices

1480

Fare

1465

1450

PdL

1435

1420 10

1405

1390

1375 2010

2011

2012

2013

2014

2015

2016

2017

2018

Source : Oxford Economics

7 2010

2011

2012

2013

2014

Italy: government balance

Italy: government debt

% of GDP

2010 0

2011

2012

2013

2015

2016

2017

2018

Source : Oxford Economics

2014

2015

2016

2017

2018

130 125

Fare -1

-2

PD PdL

120 115

PD 110

-3

105

-4

Fare

PdL SC

-5

100 2010

Source : Oxford Economics

2011

2012

2013

2014

2015

2016

2017

2018

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