State of the economy dominates the election campaign

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.