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A structural analysis of Italy’s fiscal policies after joining the European Monetary Union: are we learning from our past?

PFM, Vol. 8 No. 3, (2008)

Italy’s public finances improved dramatically in the period 1992-97, helping to secure participation in the European Monetary Union from the outset. There was considerable fiscal loosening in the years that followed, and the primary balance declined steadily from almost 7 per cent of GDP in 1997 to virtually zero in 2006. The paper examines the development of public finances from 1998 to 2006. The “structural” developments in the main budgetary components are assessed, excluding the effects of the economic cycle and of temporary measures. The analysis shows a rapid deterioration up to 2003, whose roots can be traced back to the consolidation of the early 1990s, achieved primarily by means of tax increases and cuts in capital expenditure. Since 2004 there has been a structural improvement, initially modest but substantial in 2006. Sustaining this adjustment and making further progress may again prove difficult, as the fiscal correction is similar in nature to the previous consolidation effort.

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