Il Sole 24 Ore - 09/30/2018
«I am here with you to do an interview as Minister of Economy. This seems to me a clear answer to the rumors about my resignation, which I have never threatened to tender».
With these words Giovanni Tria opened the long interview that he gave yesterday to “Il Sole 24 Ore” in his office in Via XX Settembre in Rome at the end of a Saturday afternoon of intense work on the final draft of the Update Note to the Economic and Financial Document (Def).
An update Note that aims at a growth target for the country set at 1.6% for the next year and at 1.7% for the following, and plans a reduction in the public debt of one point per year for the next three years. «It is not a strong descent - recognizes Tria - but it is greater than what has been achieved in recent years. And it will also be guaranteed by a safeguard clause on expenditures that replaces the tax revenue clauses used so far in every budget law to pencil in deficit and debt targets that have subsequently always been revised».
Minister, the 2.4% deficit target for the next three years has surprised everyone, and yesterday President Mattarella recalled Article 97 of the Constitution in which, he explained, it is “enshrined the provision for a balanced budget and a sustainable public debt.”
«I fully agree with the President of the Republic. In fact the government has a continuous dialogue with His office. A balanced budget remains our fundamental objective, even if the path to reach it is extended over time to give space to the crucial need to revive growth. And the fact remains that if conditions permit it, we will try to restart the process before the end of the three year period. The point under discussion, in fact, is how to guarantee this path within the various economic contexts».
Markets on Friday reacted to the decisions of the Council of Ministers with a flare-up of the spread and a fall in stock market. Are you concerned that this state of nervousness can be long-lasting? What do you expect for the next few days?
«My hope is that by explaining the budget law we are preparing, and the tools that this law puts in place to reach the crucial objective of growth, the alarm will recede. What worries the markets in the medium term is the debt sustainability: and we want to lay the foundations for its effective descent starting from 2019, as a precondition for an acceleration of the downward trajectory after the first three years».
In addition to the markets, the draft of budget law is also opening up a rift with Europe. Tomorrow you will fly to Luxembourg for the Eurogroup and the Ecofin meetings. How do you plan to respond to the Commission's objections?
«I fully understand the European concerns, and the fact that the projected deficit levels do not respond to EU agreements. But this is absolutely not a challenge to Europe. There may be no coincidence of views on how to operate in an anti-cyclical way during a phase of economic slowdown, but it is essential to give a clear perspective to families and investors to avoid pro-cyclical effects. If this is well understood, then an open discussion can be opened and the judgment on the 2.4% deficit target can change».
However, you yourself had pushed for a smaller deficit in the weeks before the Council of Ministers. There was a sense of a tug of war between technical targets and political will with a clear victory for the latter.
«I am a cabinet minister, therefore, as such, a politician. But it is clear that there is an ongoing dialectic between the Minister of the Treasury and the Ministers of the other Departments who want to achieve their goals as much as possible. The Minister of the Treasury looks at the overall result of these pressures, and, at the end, a way to reconcile the needs for spending with the budget considerations is found. There is therefore a negotiation process, and I assure you that there was mediation, and not little of it, of the different needs and requests».
In what terms, given the confirmation of the 2.4% deficit for next three years?
«We must consider what has emerged from June to today. The growth forecasts on which the public finance framework had been built by the previous government have changed substantially, and the latest data confirm this. The trend growth, under current legislation, for next year would be 0.9%, compared to 1.4% expected before. This brings the 2019 deficit, again in terms of trends, to 1.2%. This deficit included an increase in VAT of about 12.5 billion, which the government said from the very beginning it intended to defuse. In other words, the actual inheritance left for the 2019 budget law, under the new economic conditions, was for a deficit already substantially close to 2 percent».
At stake were the reforms promised by M5S and League...
«Not giving start to the reforms would have ended up creating a disastrous prospect: more low growth, high unemployment and increasing difficulty in reconciling the decline in public debt with social stability. We must then consider that one of the elements of growth is also political stability. Opening a conflict on a budget law that would have resulted in political instability would have led to a negative trade-off. The point of equilibrium in this process has been found in that the deficit level agreed upon gives space to an extraordinary plan of public investments. Without this plan, the planned deficit would have been 2.2% next year, and 2% at the end of the three year period. But I have said, and I reiterate now, that the revival of public investments is essential to recover the growth gap that for the last ten years has seen us a point below the Eurozone average».
Wasn't it possible to find a different way to cover costs? During the electoral campaign, and during the first months of government, there was much talk of spending review, but now it is the deficit to dominate the scene.
«Indeed in the budget law we are setting up, together with a very gradual start of the reform projects, there is a really drastic operation of spending review. This is precisely what makes it possible to find room to introduce measures that strongly stimulate growth. Only with greater growth we can be in position to solve Italy's problems».
But how do you get to a 1.6% GDP growth target for the next year and 1.7% for the following? The distance separating us from the new updated target is quite big.
«First of all with an increase in public investment. We have budgeted about two additional decimals of GDP for 2019 to then arrive at four additional decimals (6, 5 billion) in 2021 compared to the current trend. In essence, in the three years the additional public investments will be about 15 billion and we will recover half of the loss accumulated in the last ten years in terms of GDP. Regarding 2021, the deficit share above 2 percent is all made up of additional public investment».
The investment bet, however, is not new. And in recent years it has failed. Why then should it be successful now?
«I am well aware that there was already a lot of room for investments in the budget and that the problem is that the funds are not spent. We are however defining a series of structural measures in the sense of streamlining the procedures for the execution of investments and, more importantly, we are preparing new operational tools for planning and evaluation. As I have already said, I am convinced that we need a sort of new civil engineering. This convinced us that it was worth betting. But it is not a bet without a safety net».
In what sense?
«In the sense that if we win the bet to spend the sums budgeted for investments we will have more growth, otherwise we will reduce the deficit because the resources will remain in the budget. If we have less growth, in other words, this will not result in a larger deficit».
Spending measures, however, remain on the table. Why shouldn't this raise the risk of a deficit increase.
«Because the agreement we have reached in the government is also based on a safeguard clause that I asked for, and which reverses the perspective compared to the clauses used so far. In recent years, automatic VAT increase mechanisms have been introduced, which were almost always “defused”, as they say, by revising upwards the deficit and debt targets. The mere presence of this threat of tax increases, however, is harmful because if citizens live under the nightmare of a future tax increase they will not even spend whatever gain they have obtained today. However if the adjustment is on the expense side they will not have to fear to return what they have had today. With this budget law we are changing the perspective because the overall program of reforms that will be launched will also be subject to a monitoring on the results. If the bet on growth is lost or only partially won, the programs will contain a clause that provides for the review of the expenditure so that the deficit target for the next years is not exceeded compared to the set limit. In other words, unlike the budget laws of the past few years, what we write in the Def is a “clean” deficit goal, in the sense that it is not artificially lowered by a revenue clause that we already know will not be respected and that would imply an increase in the tax burden».
Even so, an increase of seven decimals in GDP growth next year compared to the trend is not likely to be too ambitious for the sole thrust of public investment?
«In fact an important role will also be played by the relaunch of private investments, which will benefit from the fiscal measures that the budget law will resume or introduce for the first time. On the tax front, all the measures we are preparing are in favor of companies and autonomous workers with a VAT number. Unfortunately we had to postpone, with regret, the easing of the tax burden on personal incomes. It should be emphasized that these estimates are conducted with the econometric models always used for public finance programs, and therefore universally shared. I would add that the estimate does not take into account the investment programs that can be accelerated, for example, by large public subsidiaries and concessionaires. This acceleration is undoubtedly possible, provided that the State does its part in streamlining the authorization procedures. According to our estimates, which in any case have not been used for the official public finance framework, considering these factors as well, the growth would be higher than what I have indicated».
Among the pillars of the budget law, and of the government contract, however, there are heavy spending measures, such as the reform of the Fornero law. Doesn't this intervention risk creating problems of sustainability?
«The intervention to facilitate the accelerated retirement of older workers by anticipating their exit compared to the current rules has a cost, I know very well. But in recent months I have had many meetings with large companies and trade representatives. And on all these occasions I have found that the request for staff rejuvenation, linked to the need to adapt their skills and improve overall efficiency in the allocation of human resources, is really strong. The social security rules in force today are slowing down this change, which is necessary to increase productivity and will largely favor young people. This process is also needed in PA».
Also on the citizenship income the expenditure estimates circulating are quite significant, and one main concern is that this tool will have more a “welfare” nuance that being an aid intended to stimulate growth. How do you judge this perspective?
«The citizenship income will have to serve to two goals: to support income in periods of transition, when a worker is looking for a new job, and at the same time to help eradicate pockets of poverty that are unworthy of a country like Italy, the seventh industrial power in the world. Therefore, it will have to be at the same time an intervention of social stabilization and of active labor policy».
Isn't there also the risk that a generalized subsidy can actually become an incentive for undeclared work?
«Certainly, for the effect to be virtuous it is necessary that new work is created, and that consequently the audience of the needy is progressively reduced. In this context it is certainly essential that there be no abuse. In this regard, I want to stress that on my request the Guardia di Finanza (Finance Police) is developing a specific control plan, precisely to avoid this phenomenon. Those who will try to access the benefits while having hidden incomes will face a high risk. And I want to reiterate that the funding of these instruments will be assured within the limits of the 2.4 percent deficit if the growth targets will be achieved».
Also on the revenue side, the most diverse estimates have circulated in recent weeks, especially on the assumptions concerning the so-called “fiscal peace”. Can we give some more certain details?
«The measure is not yet defined and therefore the same is true for the expected revenue. But for sure this will not be the basis for finding the covering for the necessary structural costs. Here at the Ministry we are studying how to act structurally on the discipline of tax litigation for the benefit of both the tax authorities and the taxpayer».
Ministry that has been the object in these difficult weeks also of heavy attacks, directed to its technical structures and to the top management of the General Account. How do you respond?
«I do not want to add anything to what I have already stated, not to fuel controversy. The technicians of the Ministry of Economy have given and are still giving a fundamental contribution, indeed I would say phenomenal, to the action of the government».