Local Finance Report no. 3 of August 2017 analyses current and historic trends in public-sector debt, in an attempt to assess the effects of more growth-oriented policies. The report also looks at two sectors – water and ultra-broadband – that are seen as strategic for local public investment
Public spending: a european comparison
Public spending reviews in Italy have long been the subject of debate. In recent years that debate has again become more vigorous, as a result of the difficulties facing the Italian economy and public finances. Social partners, politicians, the public, and academics are divided over what approach to take, preferring a more expansive or more restrictive solution depending on their theoretical approach.
By making a European comparison we can draw an initial conclusion about the Italian case. On the one hand, the level of public spending broadly mirrors that of other European economies. However, in terms of its composition, it shows a number of clear differences. There is a divergence in the amount of spending on interest payments (around twice the leading European economies) and the high level of pension spending. Specifically, pension spending is around 3.5% of GDP higher than the European average – an increase on the 1.5% differential in 1995. Turning to the expenditure of individual Italian government bodies, there is a universal trend towards reducing capital expenditure in favour of current spending. Indeed, between 2008 and 2015, while public investment in real terms fell 30% (peaking among municipal authorities, where it fell 32%), primary current account spending rose 1.6%.
The evolution of the debt/gdp ratio and the contribution of local authorities
The need for rigorous fiscal policies has for years been dictated by a stock of public debt that in absolute terms is the highest in Europe and, as a function of GDP, is second only to that of Greece. The article analyses the trend in the debt/GDP ratio, with a particular focus on the crisis years, highlighting the contribution of local authorities to budget consolidation policies. In particular, in 2016 local authorities contributed 27.5% to the achievement of Italy’s primary balance, despite only accounting for 4% of total public debt. That improvement has inevitably affected spending on investments, which are among the most productive items of public expenditure.
Growth, in fact, was the missing element in the change in debt/GDP between 2008 and 2016. Indeed, the positive contribution of primary surpluses was more than offset by the combined effect of the trend in interest rates and low nominal GDP growth. Finally, the study compares alternative scenarios in the evolution of the debt/GDP ratio, testing more expansive local public investment policies. It was found that if local authorities had been permitted to “spend” the accumulated primary surplus on new investments, the debt/GDP ratio could have fallen by around 4% in 2016.
Financing investments in the integrated water system
The Italian Integrated Water System (SII) has significant infrastructural shortcomings. To mention just a few statistics: in 2016, 35% of water entering the network did not reach end users and 22% of pipes are more than 50 years old, against an average useful life of around 40 years. It is estimated that investments of €25.3 billion would be needed to pay for the necessary modernisation work. Significant progress has been made in recent years, such as the establishment of a specialist independent authority (AEEGSI) and the introduction of regulations that allow rate adjustments in line with investments. However, diversifying the sources of investment funding is still critical for gradually bringing the water sector’s performance into line with European standards.
Investments in next-generation networks - The crucial role of local authorities
Turning to the broadband and ultra-broadband sector, massive investments are needed in high-speed, high-capacity digital networks to reduce the remaining gap between Italy and the majority of European countries. The government’s plan has already delivered its first positive results. Private investments in the two years 2015-2016 have increased 32%; public investment has also provided additional financial resources for areas of so-called “market failure”. Against this background, local authorities can play a key role by helping to cut bureaucracy, promoting public-private partnerships and making the most of national financial instruments and funding opportunities offered by the European Union.
The Report on Local Finance n. August 2, 2016 deals with - in four separate contributions - economic forces and regulatory reforms that can help promote investment, while preserving balanced budgets.
In recent years, the crisis has put a strain on the socio-economic fabric of the country and the local governments have been called on to confront the challenge: to adopt counter-cyclical policies and encourage development, without resorting to new debt
This report explores the framework that local governments operate in and outlines the main trends of the main aggregates of public finance in the last five years