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Growth and reforms must not take the back seat to political consensus

by Giorgio Santilli

IT
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The political debate around the EU's request to cut the deficit next month, the budget blueprint for 2018 and the National Reform Plan should stop relying on slogans and focus on the true issue right now: what are the priorities that the Gentiloni government must pursue and how can it fund the initiatives to pursue them?

The first question was answered yesterday by the prime minister himself. His answer is understandable: priorities and jobs are the priority. Of course, the magnitude, structural nature and terms of the measures put in place will determine their size and the necessary resources. Is it appropriate to make small adjustments, by responding to decimal-point issues with decimal-point solutions? Or do we need an ambitious boost to accelerate growth and employment, also to resolve the problem of public debt?

The economic situation is difficult: there's a risk of slowing down and being isolated, losing the tugboat effect of global growth. There's a risk of making little impact on debt.

Not to mention the risk of an EU infraction procedure that would create tension in sovereign bond markets, reducing even more the benefits of reducing the cost of interest on debt (€20 billion less in 2017 than in 2012).

Politics today has its reasons: winning consensus from voters is a decisive factor in a pre-electoral year and the last thing Italy needs is to end up being run by a populist government. The battle for a more integrated Europe and closer to citizens needs to be fought by winning with consensus.

However, the search for votes must never ignore the fundamentals, the priorities and needs of a country. It cannot ignore a difficult situation that risks becoming dangerous when the European Central Bank's quantitative easing ends.

Postponing what can be done today, even to reap the benefits of reforms already under way, would be wrong.

Let's think of public investment, the missing engine of Italy's growth. This is a decisive year for economic recovery after a disappointing 2016 which was supposed to take advantage of the flexibility granted by the EU to record strong growth and which instead missed that opportunity and continued to record a reduction in expenditure.

It's vital for Italy to restart that engine. The idea of including in the EU-requested fiscal adjustment plan next month some measures that allow Italy to accelerate the expenditure planned for 2017, find new private funding channels and simplify procedures is a good one.

Placing the emphasis of the corrective measures on spending cuts would instead cause, in this time of the year when current expenditure is no longer compressible, a reduction of capital expenditure, with the result of halting the recovery.

If we want to proceed along the path to reforms, the qualitative rebalancing of public expenditure (less current expenditure, more capital expenditure) Italy must enact a medium- to long-term policy that centralizes purchases and reduces the fragmentation of supply, establishing standard prices and eliminating unsustainable waste.

The effort must focus on the goal of restarting public investment for which much has been done in the past three years – more resources, innovative planning of EU funds, more flexibility in the Stability Pact limits, unlocking, new planning and refinancing of construction works – but has not yet translated into visible results.

Another decisive priority that cannot be postponed until 2018 is a net and structural cut of the tax wedge (and not only of the contributive component) that weighs on businesses. The government needs to reduce the labor cost burden, as long requested by the EU, the IMF, and the OECD, and create the conditions to make hiring more advantageous to businesses.

The government can decide whether to make this a priority for young employees, but the cuts must be robust and structural. The issue of resources remains. The virtuous path of growth is a narrow one, and political parties that back the ruling majority – called on to be responsible – should leave aside the arguments and aim for the “dividend” of growth and employment. We must let the government work without wearing it out by placing ever-growing limits.


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