Spending without increasing public debt is possible: here's how

From a macroeconomic perspective, 2023 ended with fireworks. Between no to Ministry of Education and Science And the new Stability and Growth PactThere is a lot to discuss.

the new Ministry of Education and Science It has not been ratified

For the first time in Italy, the non-ratification of the new European Stability Mechanism highlighted a transversal and stable majority, not subject to EU dictates and able to say no. The new MES was real Reinforced cageEspecially for Italy, because it required countries to immediately finance the rescue of the European banking system, which is what the huge German and French speculative banks essentially needed. Moreover, it introduced a mechanism in the management of countries' debts, which risked us, regardless of our will, having to accept the European Stability Mechanism and submit to all the conditions that entailed, thus ending up like Greece.

Suspending the restrictions of the Stability and Growth Pact

In the last three years restrictions Stability and Growth Pact It was suspended and Italy exploited this to increase its deficit, showing that, contrary to the official story, the debt-to-GDP ratio decreases as economic growth increases. In fact, the belief that reducing the deficit leads to a reduction in the debt-to-GDP ratio is wrong. The debt-to-GDP ratio is a fraction containing debt in the numerator (2,800 billion for Italy) and GDP in the denominator (2,000 billion). If you reduce the deficit by 100, cut public spending or increase the tax levy, this also means at least a 100 reduction in GDP, if not more, taking into account the economic multipliers. The result: the debt-to-GDP ratio rises, not falls.

Stability and New Growth Pact

Everyone agreed on the need to reconsider the restrictions of the Stability and Growth Pact, but the first indicators that were approved, which are not yet final, show a desire to keep the general framework as it is, softening Just little bit Restrictions Which they have proven previously Not applicable. In particular, for the debt-to-GDP ratio, convergence to 60% is now much slower: the ratio will decline at a rate of 1% per year. Moreover, in the early years it opens up More flexibility: It should be possible to exclude certain types of investments as well as interest expenses, which for us represent a significant amount, from the debt calculation for the first 3 or 7 years. This means recovering more than one hundred billion annually, which is not very little.

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Change the model

The problem can be solved, however We need to change the paradigm. If the state creates one hundred billion euros in transferable tax breaks annually and uses them for expansionary policies, because this tool does not lead to an increase in public debt, the debt-to-GDP ratio could rise from 145 to 90% within ten years. In fact, if you could increase public spending by a hundred billion while leaving public debt unchanged, the GDP in the denominator would increase, reducing the debt-to-GDP ratio.

To understand better mechanismSuppose the government wants to build a hospital worth one hundred million euros. How can you finance it today? There are three possibilities. The first is to increase taxes, but we have already reached a level where citizens do not have the money to pay. The second is to reduce public spending, but while pushing another sector of the economy into recession. The third mode is mode BTPs are issued for ten years On the financial markets. Assuming the order goes through, 100 million BTP at the current interest rate would yield €160 million in ten years. So the country has a 60% increase in public spending on everything it does. We need to change the paradigm.

To build the hospital, I submitted a tender that stipulated that the winning company would be paid not in euros, but with a tax deduction that could be deducted from taxes after two years. This credit is transferable, not only to the bank that converts it into euros, but also to suppliers and employees. For all intents and purposes, it's a payment tool: free, free, never expiring. It can also have an annual increase to avoid the phenomenon of “discounting” and increase its acceptance.

The advantage for the state is that the company must issue an invoice, and then pay the VAT, employees, contributions and suppliers, who in turn will pay the VAT, employees and contributions. This 100 million euros allocated to the hospital has generated a GDP of 300 million, and the state collects taxes on this 300 million in the first year. If you return this Financial currency It can be offset after two years, and it is clear that at the end of this period the debt will continue to increase, in the form of lost revenue, but the increase in tax revenue in the first year more than compensates for this measure. Moreover, after two years, I can issue more to break even. If the state carries out this process every year, it will have the profit first, and the expense only after two years, but it will not pay the interest that expires abroad.

Transferable tax credit

This tool allows the state to do Expansionary policies without increasing public debt, and avoid paying interest on BTP issues to financial markets. Mario Draghi was appointed Prime Minister specifically to prevent this measure which would have allowed the state to conduct public spending without paying fees to the financial markets. This procedure is clearly not suitable for large banks and investment funds, because they earn precisely from the 60% interest generated by purchasing BTP bonds. If they see that the state can do without it, they do and will do everything to obstruct it.

Before Christmas, we sent a concrete and achievable proposal to all institutions affected by the 2023 flood emergency in Emilia-Romagna, activating the Transferable tax credit It can be effectively used to compensate flood victims and make the area safe immediately. In this way, their circulation in the real economy is able to generate a rapid and lasting economic recovery. Why not give it a try?

Paolo Picci and Fabio Conditti, January 23, 2024

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