Transcript Background_material_for_PM_Monti_s_talk

Italy’s Strategy for Fiscal
Consolidation and Growth
Italian Government
November 2011- July 2012
Fiscal consolidation
Italy’s budgetary consolidation at a glance
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A cumulative budgetary consolidation effort of €80 billion, or 5% of
GDP, between July 2011 and 2014
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To achieve a budget deficit of 1.7% in 2012 after a result of -3.9% in
2011. This means a primary balance (before debt service costs) of 3.5%
this year
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General government account on balance, in structural terms, in 2013
Debt to start decreasing in 2013 from a forecast of 123.4% in 2012
A full 3 percentage points of GDP represent Italy’s share of the
assistance to GR, IE and PT as well as ESM capital
Crisis and Italy’s economy
Modest deterioration in Italy’s public deficit during the crisis
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4
Percentage of GDP
1
-2
-5
-8
-11
-14
-17
2000
2007
2009
2011
-20
AE
AT
Source: Eurostat.
BE
DE
DK
EL
ES
FI
FR
IE
IT
NL
PT
SW
UK
Crisis and Italy’s economy
Debt-to-GDP increased mainly due to economic crisis
180
2000
160
2007
2009
2011
140
% of GDP
120
100
80
60
40
20
0
AT
BE
Source: Eurostat
.
DK
FI
FR
DE
EL
IE
IT
NL
PT
UK
ES
SW
Fiscal consolidation
Primary surplus at 5% of GDP or above from 2014 onwards
Fiscal consolidation
Main budgetary consolidation measures
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Re-introduction of a property tax (IMU)
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All but modest pensions frozen in 2012-13
Higher excise duties on fuels and taxation of luxury goods
Sizeable savings from a pension reform that rises statutory retirement
age (SRA) to 66 years in 2012 (further increase to 67 already in law);
automatically indexes SRA to future gains in life expectancy; and
curtails early retirement
Reduction in social security and local government spending, namely
through a territorial reorganization (abolition of many provinces)
Fiscal consolidation
A spending review to increase quality of public finances
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After a thorough review of public spending, the government in June
announced savings of €26 billion between 2012-2014. Such savings will
prevent the increase by two points of the 10% and 21% VAT rates,
which would have been the second increase in one year and further
depressed consumption and economic activity
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The savings will come from sourcing all purchases of services and goods
through a central-purchasing agency; reducing public sector employees
and territorial organization, among other measures
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More savings to be announced soon as the government carries a
review of business incentives and the financing of political parties
Fiscal consolidation
Fight against tax evasion
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Ban on cash payments of €1,000 or more
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Increased crackdown on undeclared work through a closer cooperation
with the authority that collects salary-linked social security contributions
Tax evasion or misreporting of taxes becomes a criminal offence
Increased surprise, targeted spot checks for search of undeclared
revenues and VAT frauds. But less intrusive controls for citizens and
firms seen complying
Fiscal consolidation
Measures to reduce debt faster
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At least €10 billion expected in 2012 from Cassa Depositi e Prestiti
(CDC) purchase, at market prices, of government shares in Fintecna,
SACE and SIMEST. CDC to advance 60% of the estimated value
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Real estate properties, including military barracks, worth an estimated
€1.5 billion transferred to a real estate fund with the aim of selling
properties or create value
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Planned State and local property disposal is expected to yield €15-20
billion revenues over 5 years
Growth: primary target
Reforms for growth: a more competitive economy (1)
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Abolition of minimum fees for professional services; increase in number
of professionals (e.g. notaries, pharmacies, taxis)
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Spin-off of gas network SNAM from incumbent gas supplier; more
competition also in transport and other network sectors
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Ban of same sector multiple board membership (e.g. financial)
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Deregulation of retailers’ opening hours
Greater freedom for petrol stations to source supplies of oil and
products sold in convenience stores
Growth: primary target
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Reforms : more efficient, less costly administration (2)
Most administrative procedures by citizens and firms carried out online,
including simpler, faster and more transparent procedures for public
tenders. Public administration’s supplies of goods and services must go
through a central-purchasing agency
Creation of limited liability companies made easier and cheaper
All local public services submitted to open, public tenders; privatization of
firms that derive more than 90% of sales from controlling administration
Public sector employees to decrease by 10% (20% at managerial level);
holidays must be taken or are lost (cannot be ‘monetized’)
Territorial reorganisation (near elimination of provinces in some cases
replaced by leaner, more efficient metropolitan areas)
• Liberalization measures and administrative reform to increase growth by a
cumulative 2.4% between 2012 and 2020,
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Growth: primary target
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Reforms for growth: a speedier, reinforced justice (3)
Creation of a special court to handle business disputes;
• Reduction in number of small courts to increase efficiency and cut costs
• Trial length: trials should not last more than 3 years in first stage, 2 years
in appeal and 1 year at the Supreme Court. Additional years will give rise to
set compensation amounts
• Reinforcement of anti-corruption measures
• Rule of law strengthened, in particular through increase in penalties for
corruption of judicial proceedings
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Growth: primary target
Reforms for growth: a more flexible and fair labour market (4)
Before the reform: low labour market exit flexibility, weak social safety net,
insiders/outsiders dualism, generation and gender segmentation,
geographical divide (North/South)
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Unemployment benefit system for all, but less generous
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Better regulation on hiring side to make flexible, open-ended contracts
the norm and apprenticeships the main market entry channel
Active labour market policies to improve job placement and increase
incentives to work
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Growth: primary target
Reforms for growth: a more flexible and fair labour market (5)
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Reform introduces a fast, compulsory, out-of-court settlement procedure
to handle disputed dismissals for economic or other objective reasons. If
conciliation fails and:
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if economic dismissal not justified, the compensation will be capped at
24 month wages. No limit before.
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if reasons found ‘clearly non-existent’, a judge may decide for
reintegration of worker plus a maximum 12 month wages compensation.
Also no compensation limit before. Firms no longer obliged to pay social
contribution arrears.
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Growth: primary target
Short-term measures for growth
On top of reforms, great emphasis was put on growth-friendly consolidation
and, whenever possible, on measures for growth and job creation, namely:
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Lower taxes on reinvested capital and hiring young people and women
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Increased funds for, and streamlined approvals of, infrastructure projects
Government guarantees to foster SMEs access to credit
Acceleration of payment of late bills to public administration suppliers
Bridging of digital divide and spreading of ultrafast broadband
Better R&D support schemes; improved academia-business cooperation
to achieve quality research; tax credits for hiring young researchers
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Crisis and Italy’s economy
Euro area crisis is harming the economy
The excessively-high financing costs, due to the perceived euro area risk,
and the budgetary contraction are having negative effects on the economy:
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Recession in 2012 could be -2.0%, according to recent forecast by Bank
of Italy versus -1.2% in the government’s April Stability Programme
(-1.9% in IMF’s spring forecasts)
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IMF estimates Italy’s interest rates are 200 basis points higher that
economic fundamentals suggest. Each 100 bp costs additional €20 billion
in debt servicing costs over time
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Companies are also seeing their financing costs growing more than is
justified by their balance sheets, simply as they reflect Sovereign costs.
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