State of the economy dominates the election campaign

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While new data signals a clear economic downturn, record levels of taxation and high inflation, the two main political groups, Silvio Berlusconi’s People of Freedom list (PDL) and Walter Veltroni’s Democratic Party (PD), have presented their respective economic policies for the coming parliament. The worsening state of the economy makes life difficult for Veltroni as his party is closely associated with the policies of the outgoing government.

New reports by the European Union and the Italian statistical office (ISTAT) show that economic growth in Italy in 2007 was no higher than 1.5 per cent. They also predict that it will fall below 1 per cent in 2008. The employers’ organization Confindustria even estimates that the economy will grow by barely 0.3 per cent and Il Sole 24 Ore, a financial newspaper, speculates that the country may already have entered a technical recession. The bad news is compounded by a rise in inflation which officially stands at 2.9 per cent but which is worse for ordinary households because of the explosion in food and energy prices. ISTAT has calculated that the real rate of inflation for consumers is 4.8 per cent.

As if that were not enough, it has emerged that taxation has reached the highest level since 1997. In 2007, 43.3 per cent of Italy’s GDP was collected by the state. While the outgoing government of Romano Prodi has used part of the extra revenue to reduce the budget deficit, the increase in taxation has doubtlessly also contributed to the overall downturn.

Everyone agrees that there are no quick fixes for these economic troubles. Berlusconi has presented a programme which he says will tackle the current problems but he has also emphasized that he cannot perform miracles. His party has identified a number of “missions” for the coming parliament. These include the de-taxation of overtime to boost productivity and the elimination of the property tax for first-time home buyers. As a whole, the programme aims to lower the tax burden to less than 40 per cent.

In addition to that, Berlusconi’s PDL plans to increase investments in infrastructure, including a long-standing project to build a bridge between Sicily and mainland Italy. More importantly still is his announcement to pave the way for a return to nuclear power; a goal that many analysts regard as necessary in an age of rising energy prices. The party has also hinted to carry out a comprehensive reform of the public finances giving prominent space to what it calls fiscal federalism to rebalance the responsibilities between the central state, the regions and local authorities.

Veltroni does not put the same emphasis on tax cuts and he has generally been less specific on other policies. The timing of the elections is inconvenient for his party since many Italians blame the centre-left government for the ongoing crisis. Veltroni says that Italy needs to invest more in education and innovation. This is an idea that few disagree with but his proposal to build 100 university campuses was not greeted with enthusiasm. Critics say that it would be better to target resources more selectively to ensure high-quality research.

There are considerable doubts whether the Democratic Party would be able to push for comprehensive economic reforms since its historical roots are in communism. Veltroni’s decision not to align himself with the radical left has given him more freedom in the fields of labour market reform and liberalizations but it is not clear whether he is willing to use it. The recent appointment of market-minded journalist Piero Ichino as the PD’s labour market expert has given the party more credibility in this area but large parts of the left deeply resent this choice.

It is extremely likely that Berlusconi will be Italy’s next prime minister but it is not clear what kind of government he will form. His PDL shares many economic ideas with the Lega Nord but their alliance may not reach an absolute majority in both houses of parliament. A coalition of PDL and PD is a possibility but would require many compromises in the field of reforms.

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