The Small Blanket

Wagering a hefty slice of the future in just a couple of days is no small thing. And yet it is exactly what is happening: yesterday, the launching of the fiscal act; today, the meeting between Premier Mario Monti and the leaders of his “strange” majority, while the Senate’s discussion about adding budget laws to the Constitution draws to a close. With Europe in fibrillation over the Spanish tailspin and the French elections, and the backdrop of a Bundt-BTP spread hovering close to 400, Italy is trying to get Phase 2 under way. The phase that, combined with the definitive securing of public finances and utter compliance with the new European regulations, should outline the profile of the much yearned for recovery in 2013. The key word being should, because the operation (already complicated by international variables and the viscosity of a sketchy Europe that is progressing quite slowly on the topic of growth) is anything but simple. As if the upcoming administrative elections, the crisis and the scandals regarding the political parties and the return of cross-veto bedsores weren’t enough, we must also remember that we will not know the real depth of the 2012 crisis (which also comes with an inflation rate higher than the European average) until a few years from now. The government estimates a 1.5 percent decrease in the GDP, but that doesn’t say it all. Reliable international forecasts predict other, more drastic scenarios, and there is a collective awareness that the more severe the crisis, the more important it will be to stay within the limits in place to keep the 2013 budget balanced. Keep in mind that any moves toward a stronger austerity (strongly opposed by the government, which explains why there are measures to avoid them) would only have further depressive effects. And it is unthinkable, in a stressed country that from this perspective is already paying a very high price, to resort to new fiscal restrictions.

The blanket is definitely small but the draft of the law for the fiscal reform goes one step beyond acknowledging this, painting a frightful picture of the difficulties ahead. There are a lot of changes. Let’s begin with the new taxation of industry: the IRES (Imposta sul Reddito delle Società, which was proportional and varied between 27.5 percent and 33 percent) is gone and being replaced by the IRI (Imposta sul Reddito Imprenditoriale), which, among other things, includes incentives for investment in the company. The formula for the calculation of real estate by the land registry is also changing (from rooms to square meters), and there is a corresponding stabilization of the rate at0.5 percent. There will also be a “carbon tax” to sustain renewable energy.

On the other hand, the odious IRAP (Regional Tax on Production Activities), whose abolition has been a topic of debate for years, is not going anywhere. Once again, when all is said and done, a realistic evaluation demands that it (and the 35 billion euros it generates to support public health care) not be touched. Most importantly, once again there is something missing: a way to channel the capital attained from the war on fiscal evasion and the spending review into fiscal relief. Evidently, the government is in a condition that will not even allow it to think about lower taxes. This is a bad omen, no matter which way you turn it, because it is impossible to visualize a path of growth without a plan for cutting taxes, and because the road to the necessary slashing of public expenditures (800 billion euros, more than 50 percent of the GDP) is still uncertain. Are they giving up on even thinking about tax cuts because they cannot effectively make expenditure cuts? This kind of situation, especially if coupled with a season of increased recession, would have devastating effects.

The meeting between Monti and the majority leaders will necessarily have to take into account not only the spread-thermometer but also a situation that, more than opening the doors to Phase 2, is pushing us back toward Phase 1, the phase of rigor. There are a lot of things to take care of, the margin of error is small, and the resources are scarce. And without expenditure cuts and the offer of public assets on the market—combined with labor reform that is as balanced as it is vigorous—everything becomes harder. 

Furthermore, the meeting will take place as the debate at Palazza Madama—seat of the Senate—comes to a close. The excellent discussion over the past few days regarding the insertion of a balanced budget into the Constitution advances an issue first insisted upon in the mid-’80s by Nino Andreatta of the Christian Democracy. Could it be that 30 years later we have finally reached a turning point? Overall, it would seem so, especially if one considers the new European path we are being asked to walk. Still, there are both criticisms—for example, Senator Nicoli Rossi, president of a liberal think tank, points out that “balanced” appears only in the title, whereas the actual text talks about a “budget in equilibrium”—and differing interpretations of the future. These run into the issues of national sovereignty, the boundaries of democracy, and the possibility of using fiscal policy to pursue an anti-cyclical goal. However, the fact remains that Parliament is finally archiving a political chapter that had long been unresolved, often due to wretched legislative procedures. What’s more, it is doing it with a large margin of consensus, and that is another fact.