From a macroeconomic point of view, 2023 ended with fireworks. Between the no to MES and the new Stability and Growth Pactthere’s a lot to discuss.
The new MES it has not been ratified
The suspension of the constraints of the Stability and Growth Pact
The new Stability and Growth Pact
Everyone agreed on the need to review the constraints of the Stability and Growth Pact, but the first indications that were approved, not yet definitive, show the desire to keep the general framework in place, softening just a few constraints that they had previously demonstrated inapplicable. In particular, regarding the debt/GDP ratio, the convergence with respect to 60% is now much slower: the percentage would decrease at a rate of 1% per year. Furthermore, in the early years they open up further elasticity: it should be possible to exclude certain types of investments and also interest expenses, which for us represent a significant amount, from the debt calculation for the first 3 or 7 years. It would mean recovering more than one hundred billion a year, which is not very little.
The problem can be solved, but we need to change paradigm. If the State creates one hundred billion euros of transferable tax credits per year and uses them for expansionary policies, given that this instrument does not increase public debt, the debt/GDP ratio can go from 145 to 90% in ten years. In fact, if I can increase public spending by one hundred billion while leaving public debt unchanged, the GDP in the denominator increases, reducing the debt/GDP ratio.
To better understand the mechanism, let’s assume that the government wants to build a hospital worth one hundred million euros. How would you finance it today? There are three possibilities. The first, increase taxes, but we are already at such a level that citizens do not have the money to pay them. The second, cut public spending, but send another sector of the economy into recession. The third mode is that of issue ten-year BTPs on the financial markets. Assuming it goes through, 100 million BTPs at the current interest rate make 160 million euros in ten years. So the State has a 60% increase in public spending on everything it does. We need to change the paradigm.
To build the hospital I make a tender which provides that the winning company is not paid in euros, but with a tax credit, which can be deducted from taxes after two years. This credit is transferable, not only to the bank, which changes it into euros, but also to suppliers and employees. To all intents and purposes it is a payment instrument: free, free, which never expires. It can also have an annual increase in order to avoid the “discount” phenomenon and increase its acceptability.
The advantage for the State is that the company must issue an invoice, then pay VAT, employees, contributions and suppliers, who in turn will pay VAT, employees and contributions. Those 100 million euros for the hospital generated a GDP of 300 million, and the State collects taxes on these 300 million in the first year. If I return this fiscal currency offsettable after two years, obviously at the end of this period the debt would still increase, in the form of lost revenue, but the increase in tax revenue in the first year more than compensates for the measure. Moreover, after two years, I can issue more to break even. If the State does this operation every year, it will always have the profit first and the expenditure only after two years, but it would not pay interest which would end up abroad.
The transferable tax credit
This tool allows the State to do expansionary policies without increasing public debt, avoiding paying interest on BTP issues to the financial markets. Mario Draghi was appointed prime minister specifically to block this measure which would have allowed the State to make public spending without paying duty to the financial markets. Obviously, this measure is not convenient for large banks and investment funds, because they earn precisely on that 60% interest generated by the purchase of BTPs. If they see that the State can do without it, they do and will do everything to block it.
Before Christmas we sent a concrete and achievable proposal to all the institutions affected by the 2023 flood emergency in Emilia-Romagna, where the instrument of transferable tax credit it can be effectively used to compensate flood victims and immediately make the area safe. In this way its circulation in the real economy is able to generate a fast and lasting economic recovery. Why not give it a try?