A Note on the (Un)Pleasant Arithmetic of Fiscal Policy: The Case of Italian Public Debt

Luigi Marattin and Massimiliano Marzo

Economic Notes, 2009, vol. 38, issue 3, 169-183

Abstract: Using the simple arithmetic of government budget constraint, we perform an illustrative analysis on the Italian case, investigating the consequences on the main public finance aggregates of the adoption of a fiscal policy rule responding to past real debt/GDP ratio. Such a rule, firmly grounded in the economic analysis, would allow the reduction of Italy's outstanding stock of debt without requiring the strict adherence to the 3 per cent criterion for deficit/GDP ratio, as prescribed by SGP (Stability and Growth Pact). We perform a forecasting exercise under five alternative scenarios and analyse the details of a structural debt reduction strategy with alternative yearly step.

Date: 2009
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