Fiscal money is an illusion, not a solution edit

23 mai 2018

In their recent Telos post, a group of Italian economists who name themselves the Group of Fiscal Money (GFM, (1)) takes exception to my analysis of their proposed ‘fiscal money’ in a previous Telos post (2). They assert that Credit Tax Certificates (Italian acronym CCF), which are tax assets, would not increase the Italian government deficit and would even contribute to curtail the debt burden. I am not convinced by their argumentation and continue to believe that CCFs would eventually backfire by accruing to the debt burden of the Italian government. Here is why.

GFM proposition is that the government should issue very large amounts (a previous paper mentioned a €200bn, or 11.5% of the Italian GDP – see (1)) of tax credit certificates –entitling their bearers to benefit from a tax rebate after two years— and distribute it ‘free of charge’ to the population at large, individuals and companies, who would be encouraged to use them as a medium of exchange. In plain English, the benefit of a future one-off tax cut would be immediately distributed to the population (not only to tax paying entities) in the form of an exchangeable certificate denominated in euros. As the theory goes, non-tax paying entities would sell their CCF allotment to taxpayers before redemption.

GFM authors correctly argue that, from a National Accounting perspective, these bounties would be considered as ‘non-payable deferred tax assets’ and, as such, would not immediately accrue in the budget deficit. Yet, since they are tax credits, they would result into lower tax revenues upon their exercise. If the story ended here, Italy’s budget deficit would soar dramatically two years after issuance, which would translate one-for-one into higher debt. GFM argues that, via the fiscal multiplier effect, higher tax income due to faster growth would offset the impact of the tax rebates. While this possibility cannot be excluded, it seems reckless, to say the least, to build a fiscal strategy on fiscal multipliers estimates, which are highly uncertain. For instance, a thorough review of estimated fiscal multipliers by ECB researchers, using inputs from National Central Banks, including the Bank of Italy, is suggesting that short-term multipliers associated with tax cuts are significantly lower than 1 for Italy (see 3). There is therefore a significant risk that, upon redemption, the Italian budget deficit would very significantly increase, and, with it, the government debt.

There is nevertheless an escape way, which is even more worrisome than the one-off scenario by which CCFs would be issued once for all. In their previous paper, GFM authors are alluding to a €200bn annual issuance, opening the door to a revolving issuance of tax credit certificates. On a consolidated basis, Italian tax payers, whether individuals or companies, would benefit from a permanent tax cut, a trick performed by new generations of CCFs, not by a reform of the tax code. One may wonder whether statistical authorities would continue to consider these tax credits as ‘non-payable deferred tax assets’, once they have become permanent. If this were the case, statistical authorities would have given their blessing to yet another version of the ‘perpetual motion engine’ that amateur scientists are dreaming of, ignoring the second law of thermodynamics. In the real world, this wouldn’t happen, because tax cuts which are not matched by spending cuts are boiling down to higher deficits and therefore higher debt and there is no statistical trick to evade this reality.


Lastly, I agree with GFM authors that Italy needs fiscal leeway to plug the large output gap accumulated since 2008. In contrast with other Eurozone countries hit by the euro crisis in 2010-2011 (Spain, Portugal, Ireland and Greece), Italy doesn’t have a significant external debt, which means that debt is an issue between the private sector (households and companies), which has very little leverage, and their government, which is over-leveraged. Therefore, Italian policymakers’ top priority should be to restructure and recapitalise the banking system, so that credit flows again through the economy and boosts production. To achieve this transformation, Italy needs to negotiate more fiscal leeway with the EU Commission and Italy’s partners should support this strategy. Under the key condition that banks are truly restructured, which may have political drawbacks, and bad assets transferred to a public defeasance structure, fresh bank loans to consumers and profitable companies would give a decisive fillip to the still weak Italian economy. This would be a much safer way to sail toward full employment than the reckless decision to issue ‘fiscal money’, I believe.

(1) ‘Free fiscal money: exiting austerity without breaking up the euro’, White Paper by Biagio Bossone, Marco Cattaneo, Luciano Gallino, Enrico Grazzini and Stefano Sylos Labini, 2015.

(2) ‘La dimension Frankenstein du risque politique italien’, 7 May 2018

(3) ‘Comparing fiscal multipliers across models and countries in Europe’, Juha Kilponen and alii, ECB Working Paper Series No 1760 / March 2015. See tables p. 33-34 for instance.