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Italy: An internal instability story
Fabrizio Ghisellini
LSE, 30-31March 2006
Italy: An internal instability story
• Internal Stability Pact: the Italian way
• Some unpleasant budgetary arithmetics
• April 11th :the agenda
Italy: An internal instability story
Internal Stability pact: the Italian way.1
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Legal framework:geological layers
Continuous emergency: No time for reforms
No human resources
Political tensions
ISP as a last minute control variable
Italy: An internal instability story
Internal Stability pact: the Italian way.2
“Since its introduction in 1998, the Internal
StabilityPact has been subject to substantial
amendments on almost an annual basis.
Surprisingly, however, the principles governing
the Internal Stability Pact remain significantly
different from the rules of the EU Stability Pact.
In fact, the main obligation of local authorities is
not based on an expense/GDP ratio but on a
simple limitation of public expenditures,
essentially a prohibition of expenditures
exceeding certain thresholds.”
©Squire, Sanders & Dempsey L.L.P
Italy: An internal instability story
Internal Stability pact: the Italian way.3
“Thanks to the smart setup of the ISP for 2006,
my municipality is now able to run a much
bigger deficit and fully fund the local art
festival.All I have to do is to forego a robust
chunk of my budgeted revenues in exchange
for a smaller amount of due expenses on goods
and services.”
The Mayor of X, Decemmber 2005
Italy: An internal instability story
Internal Stability pact: the Italian way.3
Unconstrained debt: results (2001=100)
140
130
120
110
100
90
2001
2002
2003
State
Local authorities
2004
2005
Italy: An internal instability story
Some unpleasant budgetary arithmetics.1
• Expenditure side: even with NO real growth of social
needs (schools, roads,transportation,etc.), HIGH
correlation with nominal GDP growth
• Revenue side: LOW correlation with nominal GDP
growth
– 60% (real estate tax,etc.) lagged/piecewise function
of cycle
– Decreasing AND unpredictable transfers
Local authorities: actual core current balances and
virtual stabilizing transfers(2001 expenditure=100)
120,0
110,0
100,0
90,0
80,0
Current expenses
70,0
Current core revenues
Stabilizing transfers
60,0
50,0
40,0
30,0
20,0
2001
2002
2003
2004
2005
2006
Actual vs.stabilizing transfers
(2001=100)
125.0
120.0
115.0
110.0
105.0
Stabilizing transfers
Actual transfers
100.0
95.0
90.0
85.0
80.0
2001
2002
2003
2004
2005
2006
Towards unsustainability:
aggregate current balances of local authorities
with more than 5000 residents
32.0
31.5
31.0
bn €
30.5
Current expenditure
30.0
Current revenues
29.5
29.0
28.5
28.0
2001
2002
2003
2004
Italy: An internal instability story
April 11th :the agenda
• Dispose of meaningless/harmful legislation unduly
penalizing local authorities (i.e. prohibition of debt
rollover)
• Introduce agreed direct,transparent,medium-term caps
on debt dynamics
• Provide for LABGI-style reforms capable of making
local budgets structurally sustainable
• Last but not least, change the approach : local authorities
should be partners in value creation