Ricerca Oxford Economics sui programmi elettorali de partiti

Impact of the economic measures proposed by Italian parties

February 2013

A report for Corriere della Sera

Contents

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

1 Introduction ..................................................................................... 5

2 Measures proposed by the Italian parties ...................................... 7

2.1 Fare per Fermare il Declino ........................................................................ 7

2.2 Partito Democratico .................................................................................... 8

2.3 Popolo della Libertà .................................................................................... 8

2.4 Scelta Civica – Con Monti per l’Italia .......................................................... 9

2.5 Similarities between the proposed measures .......................................... 10

3 Simulation results ......................................................................... 11

3.1 Input variables and OE assumptions........................................................ 11

3.2 Measures of the economic impact ............................................................ 12

3.3 Results and comparison ........................................................................... 14

4 Conclusions ................................................................................... 18

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

3

Executive Summary

Background

The election which will be held in Italy on February 24th and 25

th 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

4

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.

5

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)

o “Partito Democratico” (PD)

o “Popolo della Libertà” (PdL)

o “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:

Definition of priorities

Tax measures

Public expenditure measures

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.

6

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.

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.

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 [email protected] or Fabio Ortolani at

[email protected].

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.

http://www.oxfordeconomics.com/

mailto:[email protected]

mailto:[email protected]

7

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.

8

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 re-

modulation 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

9

(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.

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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.

11

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.

12

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.

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.

13

The variables are:

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.

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.

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.

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.

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.

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

14

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:

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.

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

15

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

16

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.

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.

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

17

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.

18

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.

19

Appendix

2013 2014 2015 2016 2017 2018Fare per Fermare il Declino

Real GDP - % change -1.1 0.4 1.0 1.5 1.5 1.9

Unemployment rate - % 12.5 12.6 12.1 11.5 10.7 9.9

Household income - % change -3.2 0.4 0.7 1.6 2.2 2.3

CPI Inflation - % change 2.2 1.2 0.8 0.7 0.4 0.3

Government balance - % of GDP -2.3 -1.7 -1.8 -2.0 -1.5 -1.5

Government debt - % of GDP 126.4 125.6 122.0 118.1 115.2 112.4

Partito Democratico

Real GDP - % change -1.4 0.4 1.1 1.4 1.4 1.4






Popolo della Libertà

Real GDP - % change -0.8 0.6 1.4 1.7 1.7 1.2


Household income - % change -2.6 -0.5 1.2 1.6 1.6 0.8




Scelta Civica - Con Monti per l'Italia

Real GDP - % change -1.4 0.4 1.3 1.4 1.6 1.5






Table 3.1: simulation results

(growth rates and levels)

20

2013 2014 2015 2016 2017 2018Fare per Fermare il Declino

Real GDP - % difference 0.1 0.1 0.0 0.3 0.5 1.1

Unemployment rate - level difference 0.0 -0.1 -0.1 -0.2 -0.5 -0.8

Household income - % difference 0.3 0.7 0.5 1.2 2.1 2.9

CPI Inflation - % difference -0.2 -0.7 -1.0 -1.6 -2.5 -3.6

Government balance* - level difference -0.1 0.2 0.0 -0.4 0.0 -0.2

Government debt - level difference 0.0 -1.3 -4.0 -6.5 -7.7 -8.6

Partito Democratico

Real GDP - % difference -0.2 -0.1 0.0 0.1 0.3 0.4

Unemployment rate - level difference 0.1 0.1 0.0 0.0 -0.1 -0.1

Household income - % difference -0.1 0.5 0.6 0.7 0.9 0.9


Government balance* - level difference -0.1 0.0 0.0 0.1 0.1 0.2

Government debt - level difference 0.1 -0.9 -1.7 -2.7 -3.7 -3.6

Popolo della Libertà

Real GDP - % difference 0.3 0.6 1.0 1.5 1.9 1.8

Unemployment rate - level difference -0.1 -0.5 -0.8 -1.1 -1.3 -1.5

Household income - % difference 0.9 0.4 0.7 1.5 1.8 1.1


Government balance* - level difference -0.5 0.2 -0.6 -1.6 -2.0 -1.7

Government debt - level difference -1.2 -6.5 -11.6 -15.9 -19.5 -17.0

Scelta Civica - Con Monti per l'Italia

Real GDP - % difference -0.2 -0.1 0.2 0.4 0.6 0.8

Unemployment rate - level difference 0.1 0.1 0.0 -0.1 -0.2 -0.3

Household income - % difference -0.2 0.1 0.8 1.5 2.2 2.2

CPI Inflation - % difference 0.0 -0.1 -0.3 -0.5 -0.7 -0.9

Government balance* - level difference 0.3 0.2 0.3 0.3 0.4 0.5

Government debt - level difference -0.6 -2.2 -4.5 -6.6 -8.7 -8.9

* A positive number implies an improvement of the government balance

Table 3.2: impact of policies

(differences with respect to baseline)

21

7

8

9

10

11

12

13

14

15

2010 2011 2012 2013 2014 2015 2016 2017 2018

Fare

PD

PdL

SC

Italy: unemployment rate%

Source : Oxford Economics

-5

-4

-3

-2

-1

0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Fare

PD

PdL

SC

Italy: government balance% of GDP


1375

1390

1405

1420

1435

1450

1465

1480

2010 2011 2012 2013 2014 2015 2016 2017 2018

Fare

PD

PdL

SC

Italy: real GDP€ billion - 2005 prices


100

105

110

115

120

125

130

2010 2011 2012 2013 2014 2015 2016 2017 2018

Fare

PD

PdL

SC

Italy: government debt% of GDP


22

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Ricerca Oxford Economics sui programmi elettorali de partiti

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