In the preceding post, I used general government total expenditure in percent of Gdp as a measure of government size. Of course, this measure includes the burden of public debt, i.e. interest payments on outstanding (gross) stock of debt. This aggregate is, in my view, the proper way to measure overall resources the state “captures” in a market economy. The burden of sovereign debt is the result of discretional fiscal choices (the preferred way to finance every given program of spending) and thus it integrally fits in the notion of government and its dimension (what sometimes I called Leviathan in this blog when a hypothetical optimal size has been explored). In Italy this burden is exceptionally heavy, around 5 percentage points of Gdp in the last decade. Of course, for a given term structure, the scale of this burden depends on both the size of outstanding debt and its average unit cost, i.e. the interest rate paid on subscribed loans. The latter is a variable that can be influenced only to a very limited extent by government. Thus, when the question is how, if ever, cut public spending, the relevant aggregate is government expenditure net of interest payments (and to be accurate even this aggregate includes some irrevocable or binding programs of spending).
Graph 6 shows this new measure for a sub-sample of four European countries: Italy, Germany, France and Spain. Historically, France and Spain represent the polar cases of (relatively) heavy and light government, respectively, even if in the last years Spain caught up with the levels of .Italy and Germany. Let us concentrate on the dynamics of these two countries. Italy’s level of general government expenditure net of interests as a share of Gdp has been smaller than that of Germany until 2005, but since 2006 onwards it became higher. In the last years before the Great Recession both countries experienced a phase where this share declined, but in Germany this pattern was more steady, intense and lasting than it was in Italy. Between 2003 and 2007, public expenditure decreased of 10.5 percent in Germany and only of 0.6% in Italy (even in France the reduction was greater even if in this country the level remained largely greater than in Italy – about 8 percentage points). Note that between 1993 and 2000, Italy was able of reducing its share of 9 % (corresponding to four percentage points, from 43.4 to 39.5, the lowest figure for this country in this time range).
So, when, how in these day, we observe a big coalition like the current Italy’s government so undecided and uncertain in adopting a feasible and credible plan of radical spending cuts, these past experiences should be remembered.
Cut public spending is not easy, but it is possible and feasible. And it has bee realized in the past.
In other earlier posts I outlined some reasonable paths for action.
Now it would be nice to the government to do its part, that a program of detailed scheduled cuts was specified and rapidly implemented (with the proper gradualist approach, of course). This government may count on an extraordinarily large majority that should be enough to resist lobbying and rent seeking of implied interest groups. And this time let avoid, please, the rhetoric of the notorious spending review.
Sofia 