Italian Populists Bring Promises With Hefty Price Tags

(Bloomberg) -- Populists may be coming soon to power in Italy with ideas including a flat tax for all that could blow a hole in the country’s finances if they are ever implemented.

The various promises, which also cover a lower retirement age and a guaranteed income for the poor, would probably provide a short-term growth boost. Still, they risk heaping additional fiscal burden on an economy already crippled with debt, unless the measures are offset by spending cuts or tax increases elsewhere.

Italy’s economy is forecast to grow 1.5 percent this year, making it the worst performer in the 19-nation euro area. Unemployment constantly around 11 percent is above euro-area average, while the nation’s debt burden at over 130 percent of its output is the region’s second-highest after Greece.

While some of the ideas from the upstart Five Star Movement and anti-immigrant League may amount to little more than campaign bluster, they have politicians sniping and economists seeking to put things into perspective. After all, in the populists’ own words, none of what has been promised is set to be translated in legislation before next year at the very earliest.

“Governments led by new, unorthodox parties have a learning curve which makes them slower in execution and de facto more fiscally prudent than what their campaigns suggest,” said economist Raffaella Tenconi, founder of London-based consultancy ADA.

She pointed out in an interview Thursday that the League, for example, is “not genuinely eager to severely disrupt the fiscal structure of Italy.”

For now, financial markets seem to be taking the Italian political picture in their stride.

After declining 1 percent on Thursday amid the reports of government talks between League and Five Star, Milan’s FTSE MIB benchmark stock index was up again on Friday. The government 10-year bond yield was down 4 basis points to 1.89 percent, while the spread with equivalent German bunds narrowed almost 4 basis points as of 12:33 p.m. Rome time.

At a Price

League leader Matteo Salvini and his Five Star counterpart, Luigi Di Maio, were heading into a weekend of intense negotiations that could lead to a new government by the end of next week. They are seeking to break the deadlock created by inconclusive elections on March 4.

Measures on their table that could push public spending and revenue out of control just as a more robust economy was starting to cut the country’s debt load include:

  • The repeal of the latest pension reform with a lowering of the retirement age which may cost about 15 billion euros ($18 billion) per year, according Carlo Cottarelli, previously an executive director at the International Monetary Fund.
  • A 23 percent flat tax for all as proposed by the League and the other parties of the center-right bloc before the elections. According to Tenconi’s estimates it would lower tax revenue by around 40 billion euros per year. Five Star also favors slashing taxes.
  • Five Star lawmakers have long pushed for a “citizens’ income” of 780 euros a month and are likely to keep up the pressure. They said it would cost about 17 billion euros a year although the head of the pension agency disputes this and says it could cost as much as 30 billion euros.

Flat Tax

A Five Star-League government would approve a flat tax and a citizen’s income during 2019, senior Five Star lawmaker Vincenzo Spadafora told newspaper Corriere della Sera in an interview published on Friday.

Still, John Normand, head of cross-asset fundamental strategy at JPMorgan, told Bloomberg TV on Thursday: “I’m not convinced that the level of sub-optimal policy making is going to be that extreme.”

©2018 Bloomberg L.P.

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