## 1. Italy Has Never Been a Low-Debt Country

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---

### Introduction: Italy’s debt position and outlook
- Italy has the highest public debt in Europe.
- Italy has never been a low-debt country.
- Like a few other EU countries, Italy joined the EMU with a debt-to-GDP ratio above 100 percent.
- Based on current policies, prospects for durable and substantial debt reduction are remote.
- Taking into consideration factors such as increasing aging-related spending, debt is expected to continue to rise slowly in the medium term and sharply increase after 2030.
- Publicly debated option: sell part of the state’s assets by creating a holding company (initially state-owned) with capital equivalent to the value of public assets for sale; the company would sell public assets and be listed on the stock market. Proceeds would be used to reduce debt or via sale of the holding’s equities.

### Historical context (Box 1)
- For most of the time between unification and World War II, public debt was above 60 percent of GDP.
- Debt went above 100 percent of GDP in three periods: end of the nineteenth century, after World War I, and during World War II (Francese and Pace, 2008).
- Relatively low-debt period: mid-1960s (in 1964, debt was below 30 percent of GDP with a balanced budget).
- Primary expenditure rose from 29 percent of GDP in 1964 to 43 percent in 1985, accompanied by increased interest spending.
- Despite fiscal consolidation beginning in the mid-1980s, public debt rose to almost 100 percent of GDP in 1991.
- Debt exceeded 120 percent of GDP in 1994, partly because of large valuation effects following Italy’s exit from the European Exchange Rate Mechanism.
- Debt declined in the run-up to euro adoption (helped by emergency measures, privatization, and declining interest rates); after joining the EMU debt ratio continued to decline but began to grow again in 2005 as the primary balance deteriorated and economic growth languished.

### Italy: Public Sector Balance Sheet (Estimated Values), 2003 (Percent of GDP)
- Total assets 73.2
  - Central government 48.6
  - Local governments 10.8
  - Social security funds 10.8
  - Public sector total 73.2
- Of which:
  - Equity investments 8.0 (central) 5.8 (local) 0.0 (social) 13.9 (public sector)
  - Intangible fixed assets 1.6 (central) 4.7 (local) 0.0 (social) 6.3 (public sector)
- Tangible assets 42.9 (central) 29.2 (local) 0.5 (social) 72.6 (public sector)
  - Land 0.4 (central) 2.7 (local) ... 3.1 (public sector)
  - Natural resources 10.8 (central) 1.8 (local) ... 12.7 (public sector)
  - Residential buildings 0.4 (central) 4.9 (local) ... 5.3 (public sector)
  - Nonresidential buildings 2.9 (central) 4.1 (local) ... 7.0 (public sector)
  - Infrastructures 1/ 21.4 (central) 13.5 (local) ... 34.8 (public sector)
- Total liabilities 73.2 (central) 48.6 (local) 10.8 (social) 73.2 (public sector)
  - Debt 101.4 (central) 5.3 (local) ... 106.7 (public sector)
  - Provision for future risks and charges 0.2
- Net equity (deficit) 28.4 (central) 43.3 (local) 10.8 (social) 82.6 (public sector)
- Source: Ministry of Economy and Finance, Italy's Stability Programme, Update November 2004.
- 1/ Item includes infrastructure in transport (e.g., railways and motorways), energy (e.g., electrical grid), telecommunications (e.g., fiber optic network), and education (e.g., schools).

### Direct financial impact of selling assets
- Accounting perspective: selling assets and using proceeds to reduce debt does not directly affect government net worth.
- Cost-benefit criterion: an asset should be sold or commercialized if the return obtained is higher than the return (even if implicit) when the asset is in government hands.
- Additional potential benefit: efficiency gain from decreasing the government’s role in the economy (empirical evidence is mixed).
- In practice, EU countries have not heavily sold nonfinancial assets to reduce debt; nonfinancial asset sales have been used only marginally for debt reduction.
- Italy is estimated to have sold assets for about 2 percent of GDP over the period 1997–2006 (Momigliano and Rizza, 2007).
- Securitization and real estate sales and other operations in Europe (selected examples and percent of GDP):
  - Austria 2000–01 Sales of real estate 0.7
  - Belgium 2001–06 Sale of public assets 0.9
  - Finland 1995– Securitization of ARAVA loans...
  - Germany 1997 Corporatization of hospitals 0.2
  - Greece 2000–01 Securitization operations 2.6
  - Italy 2000–06 Securitization and sales of real estate assets 1.9
  - Portugal 2002 Sales of fixed line to Portugal Telecom 0.3
  - Denmark 1997 Sales of government buildings and land 0.1
  - Sweden 1998 Sale of real estate 0.9
  - U.K. 1997 Sale of Ministry of Defense buildings 0.1
- Note: Some accounting differences may not be ruled out.

### Operational considerations for asset sales
- Asset sales should be part of an overall strategic plan for managing public assets, focusing on:
  - Identifying surplus/low-return assets to transfer ownership to the private sector while securing better value for money.
  - Making more efficient use of retained assets to create permanent savings and improve public finances.
- Valuation challenges:
  - Nonfinancial assets are heterogeneous; some lack market values (e.g., archaeological properties).
  - Transparency and accountability are critical to prevent assets being sold cheaply and to prevent rent-seeking.
  - Italy’s census of public properties by the Agenzia del Demanio and creation of a property database are important steps.
- Explicit costs and social transfers:
  - Selling assets (e.g., houses rented below cost) can make implicit subsidies explicit, potentially increasing explicit social transfer budgets.
- Ownership and liability mismatch:
  - Public debt is almost entirely owed by central government, but about 40 percent of nonfinancial assets are owned by local governments, complicating sales because local governments may not accept using their property to offset central government debt.

### Indirect effects on fiscal discipline
- Selling assets could create an “illusion” of sustainability by lowering gross debt while not changing net worth, potentially weakening fiscal discipline.
- Debt reduction from asset sales could induce fiscal relaxation as perceived “room” for additional spending grows.
- Historical pattern in EU experience: temporary asset-based remedies tend to be used when short-term fiscal considerations dominate; structural fiscal measures have driven durable debt reduction once short-term pressures abate.
- Other high-debt countries have substantially reduced public debt mainly through permanent fiscal measures without heavy reliance on extraordinary asset sales.

### Improving management of government’s estate: The U.K. experience (Box 2)
- 2006: U.K. launched the High Performing Property (HPP) strategy with four key challenges:
  - selling surplus assets to free resources for new investment;
  - transferring ownership of assets to the private sector, securing better value for money;
  - identifying and capitalizing hidden assets; and
  - increasing value for money from retained assets and property.
- HPP framed actions around four components:
  - Leadership and integration to (i) offset fragmentation of the estate; (ii) integrate asset management into strategic business planning and policy delivery across government departments and their arms’ length bodies; and (iii) revisit governance frameworks;
  - Benchmarks and standards to (i) provide a framework that sets out best practice and performance objectives; (ii) provide tools, guidance, and support to help government organizations implement the practice set and meet objectives; and (iii) develop and use property asset management plans;
  - Skills and capability to ensure skilled professionals are involved in implementation of best practice across government organizations;
  - Review to create a culture of evidence based on the review process and to improve accountability and transparency in property asset decision making.
- 2007: National Audit Office first review under HPP (NAO, 2007); expected to realize about £1 billion (almost 0.1 percent of 2006 GDP) in annual efficiency savings by 2013.
- Review identified implementation weaknesses and made detailed recommendations for improving how government bodies strategically plan, occupy, and manage their office property requirements.

### Implementation weaknesses and recommendations (public estate management)
- Specific needs stressed by the report:
  - (i) better data on building location, costs, occupation density, and day-to-day occupational level;
  - (ii) better sense of relative performance to target improvements for individual buildings and across departments;
  - (ii) better use of space through the introduction of flexible working arrangements;
  - (iii) reallocation of government posts from the most expensive regions to the cheapest.

### Role and limits of asset sales in fiscal consolidation
- Selling public assets can produce temporary reductions in gross public debt and may improve net worth if done to make more efficient use of assets.
- Complications in selling assets include valuation and ownership issues.
- Asset sales are characterized as "one-off measures" that affect general government net lending/borrowing for a few years but not permanently.
- Debt-to-GDP dynamics depend on differences between the real interest rate on government debt and GDP growth rate, and the primary fiscal balance; thus selling public assets has only a temporary impact on debt unless it permanently lowers the cost of debt relative to economic growth.

### European experience: use of one-off measures versus structural measures
- 1995–2000: EU countries used asset sales and other one-off measures extensively in the run-up to the EMU to reach the Maastricht fiscal criteria; positive correlation observed between changes in government liabilities and changes in government assets during 1995–2000.
- After 2000: positive correlation between changes in government liabilities and changes in government assets disappeared; improvements in net worth relative to changes in liabilities are much larger than in the previous period.
- Evidence from selected countries:
  - Belgium: public debt was 134 percent of GDP in 1995; by 2006 debt was about 88 percent of GDP — a reduction of more than 25 percent of GDP since 1999, mainly through structural measures.
  - Italy: public debt was about 10 percentage points lower than Belgium's in 1995 but remained high, at 106.8 percent of GDP in 2006.
  - Ireland and Greece: debt-to-GDP ratios fell by about 20 percentage points after joining the EMU.
- Comparative fiscal performance (1997–2006):
  - Belgium’s accumulated primary balance without one-off operations between 1997 and 2006 amounted approximately to 50 percent of GDP.
  - Italy’s consolidation in the same measure was less than half of Belgium’s.

### Fiscal cost implications and counterfactuals
- Italy example:
  - Italy’s average cost of debt in 2006: 4.5 percent.
  - If Italy’s debt ratio had been reduced by the same amount as Belgium’s, approximately 0.8 percent of GDP in interest expenditure would have been saved in 2006 compared with the actual outturn.
  - Had Italy targeted and implemented the same fiscal structural consolidation as Belgium (i.e., excluding one-off measures), its debt would have declined close to Belgium’s debt levels.

### Determinants of successful consolidation (Belgium case)
- Belgium’s success attributed to:
  - A major adjustment effort in the mid-1990s that put the debt-to-GDP ratio on a downward path.
  - A subsequent policy of “maintenance.”
  - Discretionary expenditure tightening combined with fiscal institutional reforms, in particular at the subnational government level.

### Conclusions and policy lessons
- Selling public assets has merits if it improves efficiency of asset use and net worth, but risks creating an illusion of fiscal space that undermines fiscal discipline.
- Short-term fiscal goals (e.g., meeting Maastricht criteria) encouraged recourse to temporary measures; when those pressures eased, countries shifted to structural measures as main drivers of consolidation and debt reduction.
- A strategic plan of public estate management would:
  - Help identify surplus assets.
  - Generate savings through more efficient use of retained assets.
  - Set priorities and increase transparency of the sale process, with the primary objective of securing better value for money.
  - Enhance efficiency of estate management and create permanent savings, reducing reliance on extraordinary measures.
- Experience of high-debt European countries indicates feasibility of significant debt reduction without heavy use of extraordinary operations.

### Key statistics and exact figures cited
- 0.1 percent of 2006 GDP (in annual efficiency savings by 2013).
- Belgium public debt: 134 percent of GDP in 1995; about 88 percent of GDP by 2006.
- Italy public debt: 106.8 percent of GDP in 2006.
- Belgium nominal economic growth (2000–06): 3.7 percent.
- Italy nominal economic growth (2000–06): 3.5 percent.
- Belgium accumulated primary balance without one-off operations between 1997 and 2006: approximately 50 percent of GDP.
- Italy’s average cost of debt in 2006: 4.5 percent.
- Estimated interest expenditure saving for Italy in 2006 under Belgium-like debt reduction: approximately 0.8 percent of GDP.
- Ireland and Greece: debt-to-GDP ratios fell by about 20 percentage points after joining the EMU.

*Source: _pdp01 - 1. Italy Has Never Been a Low-Debt Country._*

### 1. Italy Has Never Been a Low-Debt Country...........................................................................3

### 1. Italy Has Never Been a Low-Debt Country

### Introduction: Italy’s debt position and outlook
- Italy has the highest public debt in Europe.
- Italy has never been a low-debt country.
- Like a few other EU countries, Italy joined the EMU with a debt-to-GDP ratio above 100 percent.
- Based on current policies, prospects for durable and substantial debt reduction are remote.
- Taking into consideration factors such as increasing aging-related spending, debt is expected to continue to rise slowly in the medium term and sharply increase after 2030.
- One option publicly debated is selling part of the state’s assets to reduce public debt by creating a holding company (initially state-owned) with capital equivalent to the value of public assets for sale; the company would sell public assets and be listed on the stock market. Proceeds would be used to reduce debt or via sale of the holding’s equities.

### Historical context (Box 1)
- For most of the time between unification and World War II, public debt was above 60 percent of GDP.
- In three periods it went above 100 percent of GDP: at the end of the nineteenth century, after World War I, and during World War II (Francese and Pace, 2008).
- A period of relatively low debt: mid-1960s (in 1964, debt was below 30 percent of GDP with a balanced budget).
- Primary expenditure jumped from 29 percent of GDP in 1964 to 43 percent in 1985, accompanied by an increase in interest spending.
- Despite fiscal consolidation beginning in the mid-1980s, public debt rose to almost 100 percent of GDP in 1991.
- Debt grew until 1994, when it exceeded 120 percent of GDP, partly because of large valuation effects following Italy’s exit from the European Exchange Rate Mechanism.
- Afterward, in the run-up to euro adoption, Italian debt declined, helped by emergency measures, privatization, and declining interest rates; after joining the EMU, the debt ratio continued to decline but started to grow again in 2005 as the primary balance deteriorated and economic growth languished.

### Italy: Public Sector Balance Sheet (Estimated Values), 2003 (Percent of GDP)
- Total assets 73.2
  - Central government 48.6
  - Local governments 10.8
  - Social security funds 10.8
  - Public sector total 73.2
- Of which:
  - Equity investments 8.0 (central) 5.8 (local) 0.0 (social) 13.9 (public sector)
  - Intangible fixed assets 1.6 (central) 4.7 (local) 0.0 (social) 6.3 (public sector)
- Tangible assets 42.9 (central) 29.2 (local) 0.5 (social) 72.6 (public sector)
  - Land 0.4 (central) 2.7 (local) ... 3.1 (public sector)
  - Natural resources 10.8 (central) 1.8 (local) ... 12.7 (public sector)
  - Residential buildings 0.4 (central) 4.9 (local) ... 5.3 (public sector)
  - Nonresidential buildings 2.9 (central) 4.1 (local) ... 7.0 (public sector)
  - Infrastructures 1/ 21.4 (central) 13.5 (local) ... 34.8 (public sector)
- Total liabilities 73.2 (central) 48.6 (local) 10.8 (social) 73.2 (public sector)
  - Debt 101.4 (central) 5.3 (local) ... 106.7 (public sector)
  - Provision for future risks and charges 0.2
- Net equity (deficit) 28.4 (central) 43.3 (local) 10.8 (social) 82.6 (public sector)
- Source: Ministry of Economy and Finance, Italy's Stability Programme, Update November 2004.
- 1/ This item includes infrastructure in transport (e.g., railways and motorways), energy (e.g., electrical grid), telecommunications (e.g., fiber optic network), and education (e.g., schools).

### Direct financial impact of selling assets
- Accounting perspective: selling assets and using proceeds to reduce debt does not directly affect government net worth.
- Cost-benefit criterion: an asset should be sold or commercialized if the return obtained is higher than the return (even if implicit) when the asset is in government hands.
- Additional potential benefit: efficiency gain from decreasing the government’s role in the economy (empirical evidence is mixed).
- In practice, EU countries have not heavily sold nonfinancial assets to reduce debt; nonfinancial asset sales have been used only marginally for debt reduction.
- Italy is estimated to have sold assets for about 2 percent of GDP over the period 1997–2006 (Momigliano and Rizza, 2007).
- Securitization and real estate sales and other operations in Europe (selected examples and percent of GDP):
  - Austria 2000–01 Sales of real estate 0.7
  - Belgium 2001–06 Sale of public assets 0.9
  - Finland 1995– Securitization of ARAVA loans...
  - Germany 1997 Corporatization of hospitals 0.2
  - Greece 2000–01 Securitization operations 2.6
  - Italy 2000–06 Securitization and sales of real estate assets 1.9
  - Portugal 2002 Sales of fixed line to Portugal Telecom 0.3
  - Denmark 1997 Sales of government buildings and land 0.1
  - Sweden 1998 Sale of real estate 0.9
  - U.K. 1997 Sale of Ministry of Defense buildings 0.1
- Note: Some accounting differences may not be ruled out.

### Operational considerations for asset sales
- Asset sales should be part of an overall strategic plan for managing public assets, focusing on:
  - Identifying surplus/low-return assets to transfer ownership to the private sector while securing better value for money.
  - Making more efficient use of retained assets to create permanent savings and improve public finances.
- Valuation challenges:
  - Nonfinancial assets are heterogeneous; some lack market values (e.g., archaeological properties).
  - Transparency and accountability are critical to prevent assets being sold cheaply and to prevent rent-seeking.
  - Italy’s census of public properties by the Agenzia del Demanio and creation of a property database are important steps.
- Explicit costs and social transfers:
  - Selling assets (e.g., houses rented below cost) can make implicit subsidies explicit, potentially increasing explicit social transfer budgets.
- Ownership and liability mismatch:
  - Public debt is almost entirely owed by central government, but about 40 percent of nonfinancial assets are owned by local governments, complicating sales because local governments may not accept using their property to offset central government debt.

### Indirect effects on fiscal discipline
- Selling assets could create an “illusion” of sustainability by lowering gross debt while not changing net worth, potentially weakening fiscal discipline.
- Debt reduction from asset sales could induce fiscal relaxation as perceived “room” for additional spending grows.
- Historical pattern in EU experience: temporary asset-based remedies tend to be used when short-term fiscal considerations dominate; structural fiscal measures have driven durable debt reduction once short-term pressures abate.
- Other high-debt countries have substantially reduced public debt mainly through permanent fiscal measures without heavy reliance on extraordinary asset sales.

### Improving management of government’s estate: The U.K. experience (Box 2)
- In 2006 the U.K. government launched the High Performing Property (HPP) strategy with four key challenges:
  - selling surplus assets to free resources for new investment;
  - transferring ownership of assets to the private sector, securing better value for money;
  - identifying and capitalizing hidden assets; and
  - increasing value for money from retained assets and property.
- HPP framed actions around four components:
  - Leadership and integration to (i) offset fragmentation of the estate; (ii) integrate asset management into strategic business planning and policy delivery across government departments and their arms’ length bodies; and (iii) revisit governance frameworks;
  - Benchmarks and standards to (i) provide a framework that sets out best practice and performance objectives; (ii) provide tools, guidance, and support to help government organizations implement the practice set and meet objectives; and (iii) develop and use property asset management plans;
  - Skills and capability to ensure skilled professionals are involved in implementation of best practice across government organizations;
  - Review to create a culture of evidence based on the review process and to improve accountability and transparency in property asset decision making.
- In 2007, the National Audit Office conducted its first review of the performance of the government under the HPP (NAO, 2007); this is expected to realize about £1 billion (almost

*Source: _pdp01 - 1. Italy Has Never Been a Low-Debt Country._*

### 0.1 percent of 2006 GDP) in annual efficiency savings by 2013. The review identified the main

### _pdp01 - 0.1 percent of 2006 GDP) in annual efficiency savings by 2013. The review identified the main

### Implementation weaknesses and recommendations (public estate management)
- The review identified main weaknesses in implementation and made detailed recommendations for improving how government bodies strategically plan, occupy, and manage their office property requirements.
- Specific needs stressed by the report:
  - (i) better data on building location, costs, occupation density, and day-to-day occupational level;
  - (ii) better sense of relative performance to target improvements for individual buildings and across departments;
  - (ii) better use of space through the introduction of flexible working arrangements;
  - (iii) reallocation of government posts from the most expensive regions to the cheapest.

### Role and limits of asset sales in fiscal consolidation
- Selling public assets can produce temporary reductions in gross public debt and may improve net worth if done to make more efficient use of assets.
- Complications in selling assets include valuation and ownership issues.
- Asset sales are characterized as "one-off measures" that affect general government net lending/borrowing for a few years but not permanently.
- Debt-to-GDP dynamics depend on differences between the real interest rate on government debt and GDP growth rate, and the primary fiscal balance; thus selling public assets has only a temporary impact on debt unless it permanently lowers the cost of debt relative to economic growth.

### European experience: use of one-off measures versus structural measures
- In the run-up to the EMU, EU countries used asset sales and other one-off measures extensively during 1995–2000 to reach the Maastricht fiscal criteria; positive correlation observed between changes in government liabilities and changes in government assets during 1995–2000.
- After 2000, the positive correlation between changes in government liabilities and changes in government assets disappeared, and improvements in net worth relative to changes in liabilities are much larger than in the previous period.
- Evidence from selected countries:
  - Belgium: public debt was 134 percent of GDP in 1995; by 2006 debt was about 88 percent of GDP — a reduction of more than 25 percent of GDP since 1999, mainly through structural measures.
  - Italy: public debt was about 10 percentage points lower than Belgium's in 1995 but remained high, at 106.8 percent of GDP in 2006.
  - Ireland and Greece: debt-to-GDP ratios fell by about 20 percentage points after joining the EMU.
- Comparative fiscal performance (1997–2006):
  - Belgium’s accumulated primary balance without one-off operations between 1997 and 2006 amounted approximately to 50 percent of GDP.
  - Italy’s consolidation in the same measure was less than half of Belgium’s.

### Fiscal cost implications and counterfactuals
- Using Italy as an example:
  - Based on Italy’s average cost of debt in 2006 (4.5 percent), if Italy’s debt ratio had been reduced by the same amount as Belgium’s, approximately 0.8 percent of GDP in interest expenditure would have been saved in 2006 compared with the actual outturn.
  - Had Italy targeted and implemented the same fiscal structural consolidation as Belgium (i.e., excluding one-off measures), its debt would have declined close to Belgium’s debt levels.

### Determinants of successful consolidation (Belgium case)
- Belgium’s success attributed to:
  - A major adjustment effort in the mid-1990s that put the debt-to-GDP ratio on a downward path.
  - A subsequent policy of “maintenance.”
  - Discretionary expenditure tightening combined with fiscal institutional reforms, in particular at the subnational government level.

### Conclusions and policy lessons
- Selling public assets has merits if it improves efficiency of asset use and net worth, but risks creating an illusion of fiscal space that undermines fiscal discipline.
- Short-term fiscal goals (e.g., meeting Maastricht criteria) encouraged recourse to temporary measures; when those pressures eased, countries shifted to structural measures as main drivers of consolidation and debt reduction.
- A strategic plan of public estate management would:
  - Help identify surplus assets.
  - Generate savings through more efficient use of retained assets.
  - Set priorities and increase transparency of the sale process, with the primary objective of securing better value for money.
  - Enhance efficiency of estate management and create permanent savings, reducing reliance on extraordinary measures.
- The experience of high-debt European countries indicates feasibility of significant debt reduction without heavy use of extraordinary operations.

### Key statistics and exact figures cited
- 0.1 percent of 2006 GDP (in annual efficiency savings by 2013) — (figure appears in the content unit title).
- Debt and growth figures:
  - Belgium public debt: 134 percent of GDP in 1995; about 88 percent of GDP by 2006.
  - Italy public debt: 106.8 percent of GDP in 2006.
  - Belgium nominal economic growth (2000–06): 3.7 percent.
  - Italy nominal economic growth (2000–06): 3.5 percent.
  - Belgium accumulated primary balance without one-off operations between 1997 and 2006: approximately 50 percent of GDP.
  - Italy’s average cost of debt in 2006: 4.5 percent.
  - Estimated interest expenditure saving for Italy in 2006 under Belgium-like debt reduction: approximately 0.8 percent of GDP.
  - Ireland and Greece: debt-to-GDP ratios fell by about 20 percentage points after joining the EMU.

*Source: IMF PDF chapter/section _pdp01*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/pdp/2008/_pdp01.pdf_