The Italian Public Finances in the Period 1998-2007: Temporary Factors, Medium-Term Trends and Discretionary Measures

Abstract

The paper examines the development of Italy's public finances after the consolidation period 1992-97, which secured participation in the European Monetary Union from the outset. The "structural" developments in the main budgetary components are assessed, excluding the effects of the economic cycle and of temporary measures. The analysis shows a rapid deterioration in the years 1998-2003, whose roots can be traced back to the consolidation of the early 1990s, achieved primarily by means of tax increases and cuts in capital expenditure. Since 2004 there has been a structural improvement, initially modest but substantial in 2006 and 2007. Sustaining this adjustment and making further progress may again prove difficult, as the fiscal correction is similar in nature to the previous consolidation effort. Looking at the whole period 1998-2007, the deterioration of the public finances seems attributable to the difficulty to restrain the growth of current primary expenditure.

Keywords: Structural budget balances, cyclical component, temporary measures, discretionary measures

JEL Classification: H62, H20, H50, E69