Mario Draghi and The Budget

Mario Draghi is Governor of the Bank of Italy. Earlier today Hans sent me the following e-mail comment:

Senator La Malfa asked governor Draghi in a committee hearing if he had something to say about the FT piece about an Italian Default. Draghi said: "the writer has no idea of what he is writing about. Because the very people sitting in this room will be the ones that will not allow anything the like to happen." This is not a citation but what I remember having heard (radio radicale).

That sums is up nicely. I recommend a sober and cool look at this stuff, personalising doesn't help a bit. B or P, A or O is all the same.

Yesterday government and Confindustira have agreed on exempting companies with less than 50 employees from TFR transfer . That's the kind of fight we will see and it will not end before Xmas.(end of extract)

Now Mario Draghi is, as is reasonably well known, a strong critic of the current budget proposals:

Bank of Italy Governor Mario Draghi on Thursday criticized the Italian government's 2007 draft budget as relying too much on tax increases and too little on spending cuts to bring down the country's deficit.

"The net adjustments rely entirely on higher revenue," Draghi told a hearing of parliament's budget committee, adding the government's choices showed how difficult it was to cut spending in Italy. He said the maneuvers would pose problems in the medium- and long-term.

Now no one doubts Mario Draghi's determination to try and avoid further downgrades on Italy's debt, but as they saying goes "you and whose army Mario?". The gentlemen sitting in the committee room with him may be there to stop downgrades happening, but as they say, how many votes can they muster, this is the issue.

The danger is that we enter a logic where there is only one outcome. Certainly Draghi seems to be right that the budget is relying much more on trying to raise taxes than it is on addressing the need for long term structural reductions in spending programmes, several of which are set to rise and rise as Italy continues to age.

This is the opinion also of the Economist who in an article this week argue:

Its biggest reform, though, may be one taking place silently and without high-profile legislation: a clampdown on tax evasion. The government hopes that this will net more than €7 billion ($9 billion) next year. “The future of the country is at stake in the war on tax-dodging,” Mr Prodi said this week. “All else is secondary.”

That may seem absurdly hyperbolic. But the drive against tax dodging has a political significance that could outstrip its revenue-yielding capacity. In a country where the self-employed have traditionally declared a small fraction of their earnings, it is potentially powerfully redistributive. What really brought many of last week's protesting professionals out on the streets was the threat of having to pay taxes that employees cannot escape. Their ire helps to comfort the powerful left of Mr Prodi's heterogeneous administration, and may even give him enough leeway to pass other liberalising reforms.

Yet there are risks in all this. The most obvious is that the attack on tax evasion will be no more successful than previous crackdowns in getting Italians to start paying their taxes in full. But another risk is that, if it does work, it could induce the government to keep relying on higher tax revenues not spending cuts to sort out its public finances.

There is a great risk involved in the strategy, and that is that the revenue quite simply won't materialise as planned. Actually with the strong economic performance so far this year revenue has been notably robust, with taxes bringing in 18.5 billion more than was forecast earlier this year. There is no certainty however that in the conditions prevailing in 2007 this fortunate situation will be repeated, and if it isn't we will be back with Standard and Poor's and another review of Italy's credit rating, precisely the outcome which Mario Draghi wants to avoid. But as I say, how many deputies does Mario Draghi have in his party?