Italy and the IMF
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Transcript of a Conference Call on Italy|
With Carlo Cottarelli, Mission Chief to Italy and Deputy Director, European Department; and Thomas Krueger, Division Chief, European Department, International Monetary Fund
Thursday, November 13, 2003
MS. LOTZE: Good morning, everyone. I'm Conny Lotze of the External Relations Department, and I would like to welcome you to this conference call on Italy with Mr. Carlo Cottarelli, the Mission Chief to Italy and Deputy Director of the European Department, and two of his colleagues in the consultation with Italy, Tom Krueger, Division Chief in the European Department and Gian Maria Milesi-Ferretti, Deputy Division Chief and the main desk economist for Italy.
As you know, the Executive Board discussed the Article IV Staff Report and the Selective Issues paper on November 7th, last Friday. You will have seen the Public Information Notice we sent out earlier, and some of you may have accessed the documents on the password-protected website.
Mr. Cottarelli will now make some introductory remarks, and then we will open the floor to questions.
Mr. Cottarelli, please.
MR. COTTARELLI: Thank you very much, Conny.
I will just say a few words. Both the Press Information Notice that you find on the web and the staff report, the report prepared on Italy by the IMF staff, which you'll also find on the web, underscores that the main problems affecting the Italian economy are primarily of a structural nature.
During the last 10 years, the Italian economy's growth rate has been one of the lowest of more industrial countries, including in per-capita terms. In per-capita terms, Italy's average growth rate was about 1.3 percent against 1.7 percent for the other G7.
Now, over the last few years, and I will say starting from the late 1990s, the Italian authorities have started addressing these structural problems, particularly through liberalization steps in the labor market and in the product market.
Our view is that more is needed in a number of areas, and I am referring to the need to reduce the size of the public sector, reduce the size of the tax pressure and the size of public spending with respect to GDP. I am referring to the need to reassure the future or the future development of public policy and for completing the process of fiscal consolidation. I am referring to more competition in a number of sectors of the Italian economy, not particularly in the service sector.
If these reforms are implemented, this will raise Italy's potential growth rate over the medium to long run. In the short run, we see GDP growth for this year at 0.4 percent, and for next year, for 2004, we project a growth of 1.7 percent. These numbers are in line with the projections that were published at the time when the WEO was published in September, although there are of course risks I will say both on the downside and on the upside.
On the fiscal accounts, the government is targeting a reduction of the fiscal deficit from 2.5 percent of GDP to 2.2 percent this year, to 2.2 percent in 2004.
They also intend to reduce the reliance of the budget on what we call one-off measures. These are temporary measures that only have a temporary effect on public finances, but they don't affect long-term trends. Now, these one-off measures are expected, are targeted to decline from 1.5 percent of GDP in 2003 to 1.2 percent of GDP in 2004.
Now, these are all steps in the right direction. However, we are of the view that a faster pace of fiscal adjustment would have been preferable, given particularly in light of the still high level of public debt in Italy. This refers to both, the speed of reduction of the deficit and the speed of phasing out of the one-off measures.
Moreover, we see some risk to the attainment of the authorities' fiscal targets. The area of risk under the current growth projections is—as indicated in the report—about 0.5 percentage point of GDP, which means that the actual deficit that could be of the order of 2.7 percent of GDP in 2004 if all of these risks materialize.
The IMF Board noted also the need to reduce the size of the public sector by lowering the level of public spending and the level of taxation, and here we have to say there is a little progress in this respect in the 2004 budget.
The most important step forward that has been announced by the government is the reform, the continuation of the reform process in the area of the pension system. We regard the proposed amendments sent by the government to Parliament as important steps in raising the effective retirement age and in moderating the spending pressure on the pension system in the coming decades and, of course, in supporting the gradual decline in the public debt to GDP ratio.
It will be therefore critical, in our view, that the effectiveness of these reforms, in moderating the growth of pension spending is not reduced during the parliamentary debate.
I will stop at this point so that we have some time for questions.
QUESTIONER: I just wanted to check the 2004 IMF forecast for the deficit and debt. I believe they're different from the figures that are actually on Page 35. Could you just reconfirm what they are for me, please.
MR. COTTARELLI: Yes. This is a useful question because it allows me to make one clarification. The numbers that we have on Page 35, as it is indicated, I believe in footnote 4 of the table are the official projections for the deficit and also the same applies for public debt.
The way we see the fiscal situation is a bit different. As I noted in my remarks, we see an area of risk of about 0.5 percent of GDP, which means that if these risks do materialize, the deficit on current growth projections could be as high as 2.7 percent of GDP instead of 2.2 percent.
This area of risk, to be more specific, relates mostly to two items. The first item, which accounts for about 0.2 percent of GDP, relates to the fact that the government has regarded as a below-the-line transfer, and therefore not something that affects the deficit, a transfer to ANAS, which is an agency that takes care of the road system in Italy.
We think that it's difficult that Eurostat will accept this shift, unless there is a major change in the way ANAS operates in 2004, which we believe is difficult to realize in 2004. So this, in itself, will raise the deficit by 0.2 percent of GDP. The rest, the remaining 0.3 percent of GDP that could raise the total deficit to 2.7 relates to indirect taxes, which in our view are projected to increase. The authorities are projecting indirect taxes to increase too fast. The projections are relatively optimistic as the indirect taxes rise faster than both GDP and consumption.
QUESTIONER: Sorry. Just to clarify, the IMF's projection is for 2.7 percent?
MR. COTTARELLI: At the moment, if these risks materialize, yes.
QUESTIONER: Right. So, whereas, in the World Economic Outlook in September, you were predicting 2.6, it's now actually gone up to 2.7.
MR. COTTARELLI: Well, the nature of the projection has also a bit changed in the sense that in the World Economic Outlook was issued—was a technical projection. This is more in light of the actual budget that was presented.
MS. LOTZE: If there are no more questions, then we'll conclude the conference call here. Thank you very much for joining.
[Whereupon, the conference call was adjourned.]
IMF EXTERNAL RELATIONS DEPARTMENT