Every day, all the newspapers, we read that the public debt is the largest drain on the Italian economy. But what is the public debt? When did it take on this size and how would it be possible to reduce it?
The public debt is the sum of primary deficit (the difference between government spending and taxes) that a State records over time. Suppose the government starts from a position of budget balance and decides to reduce taxes, thereby creating a budget deficit (since now government spending is greater than the tax). What happens now? The government will have to raise taxes in the future? The State, in fact, can finance a deficit in several ways: it can sell its bonds to the Central Bank, may sell them to private investors, or it can finance it through the creation of new monetary base.
Italy, as we all know, is not a sovereign economy, it does not have its own central bank that is a guarantor of last resort (ie intervening IF AND ONLY IF the government does not succeed in obtaining funds from the primary and secondary securities market bond), and then funds its public debt with taxes. So let’s assume, for convenience, that the only source of financing the budget deficit the state is that of taxes; if the government repays his debt immediately, then return to the initial situation of a balanced budget; otherwise, accumulate deficits every year. The accumulation of public deficits give rise to the debt.
As mentioned before, Italy can finance its deficit (and its public debt) only through taxation, since it has renounced its monetary sovereignty from the moment he joined the Lisbon Treaty, which officially established the ‘Euro. The fact that the increases in public debt increasingly does is change the expectations of the Italians, who consume less, doing the same to reduce consumption and investment, c osicché aggregate demand suffers a negative shock. But before the Euro, as it was financing the public debt?
In Italy everything was done with the “marriage” between the Treasury and the Bank of Italy, through the purchase of government bonds, with the Bank of Italy which was the guarantor of last resort. Thirty-five years later, the Bank of Italy “divorced” from the Treasury, and since then has not intervened in the purchase of government bonds, contributing to the dramatic rise of the Italian public debt.
Why was this decision made? Why did Beniamino Andreatta and Carlo Azeglio Ciampi demonetize the national debt ? The national central bank did not carry over his “parachute feature”, exposing the Debt to speculation such as that made by George Soros in 1992. One of the probable reasons was to prepare Italy to economic suicide, that lay the use of public money, then took place from January 1, 1999, where there are no guarantors of last resort, where there are no economic growth objectives, but only to price stability (as per art. 2 of the ECB Statute). Genuine madness.
But where does this explosion of public debt?
Obviously, from ‘ increase in rates interest (the risk premium to have bought government bonds and have not kept the money); having eliminated the role of guarantor of the Bank of Italy, you are going to cut back in a not at all negligible part of the demand; this decrease in demand must be compensated in some way, ie with the increase in interest rates. To convince investors to bet on Italy, you must pay him a higher interest rate. But how then to contain or reduce a particularly high public debt? Given that the production of a state grows over time, it makes more sense to speak of the Debt / GDP , an indicator that measures the sustainability of public debt in the long run. The more the ratio is high, the more its sustainability for a state (non-sovereign) is at risk. But then how do to reduce it?
Consider the growth rate of aggregate income of an economy, what we all know as the GDP. If the GDP grows more than the real interest rate (the interest rate adjusted for inflation) the value of the Debt / GDP converges to its steady state value, ie decreases, even with public deficits. GDP is the sum of goods and services produced within a country, and a wealth, while the interest rates, in this actual case, is the outlay that the State claims to reward those who invest on its bonds; imagine the whole thing as a small business, where the GDP are its revenues, while interest costs are to be borne. The difference, if positive, generating profits which will eventually also reduce the debts of the undertaking we are talking about. But if the scenario is to further suffering for Italy, then the beautiful country would do well to look elsewhere.