20180528-NATIXIS-Italy__It_is_impossible_to_distribute_non-existent_productivity_7页_666kb

Flash Economics Summary: Italy's Economic Policy Concerns

Core Content

This document discusses the economic policy proposals of the M5S-League government coalition in Italy and evaluates the potential risks and implications of these policies on the country's public finances and long-term economic growth.

Main Proposal of the M5S-League Coalition

The coalition aimed to implement the following measures to boost household income:

• Lowering the retirement age to 60 years (currently 66);
• Creating a high universal income or at least a high minimum wage;
• Cutting taxes on households and SMEs, including the discussion of a flat tax of 15%.

These policies were based on a significant fiscal stimulus, which would have included financing the pension system deficit, supporting the universal income, and reducing tax burdens.

Why This Policy Is Worrisome

1. Public Finances Are a Strong Point

• Italy's fiscal deficit has been below the level that stabilises the public debt ratio since 2016 (Chart 2A).
• The fiscal deficit is financed by domestic savings, not external borrowing.
• The country has a significant external surplus (Chart 2B), indicating strong external financial position.

2. Stagnation of Productivity

• Labour productivity in Italy has stagnated for the past 20 years (Chart 3).
• This stagnation prevents any meaningful increase in household income or public spending, as there is no additional income to distribute.
• Wages have increased faster than productivity, leading to:
  • Weak corporate profitability (Chart 4A);
  • Depressed investment (Chart 4B);
  • Loss of cost competitiveness (Chart 4C).

3. The Need for Productivity-Focused Policies

• Economic policies should focus on:
  • Restoring investment (Chart 4B);
  • Modernising capital (Chart 6);
  • Improving labour force skills (Table 1).

Key Information from Charts and Tables

• Chart 1: Real household income in Italy has only increased by 11% since 1996.
• Chart 2A: Italy's fiscal deficit is below the stabilising level since 2016.
• Chart 2B: Italy has a significant current account surplus, indicating strong external financial health.
• Chart 3: Labour productivity in Italy has stagnated for 20 years.
• Chart 4A: Corporate profits after tax, interest, and dividends have remained weak.
• Chart 4B: Real productive investment has been depressed.
• Chart 4C: Unit labour costs have increased, reducing cost competitiveness.
• Chart 5: Real public spending has stagnated due to low productivity.
• Table 1: Italy's overall score in the OECD PIAAC survey is 248.8, ranking below most developed countries, indicating relatively low skill levels in the workforce.

Conclusion

There are significant concerns about the M5S-League coalition's focus on boosting household demand:

• Destabilisation of public finances due to increased fiscal deficit;
• Lack of income reserves to distribute, as productivity has not improved in 20 years;
• Inappropriate policy focus on consumption rather than on restoring investment, modernising capital, and improving skills.

The key objective for Italy's economic policy should be to increase productivity, not to stimulate household demand, to ensure sustainable growth and fiscal stability.

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