A few years ago, a group of economists began advocating the introduction of fiscal money to address elements of euro area dysfunction, especially in Italy. The group, of which we are members, conceives FM as a transferable and negotiable government-issued security that bearers may use for obtaining tax rebates two years from issuance. Such a security would carry immediate value, since it would incorporate a state commitment to accept it in exchange for reductions of future fiscal obligations. It would be instantaneously exchanged against euros or used as a payment instrument (parallel to the euro) in a dedicated platform where it would be accepted on a voluntary basis.
In the case of Italy, FM would be allocated, free of charge, to fund public investments and social spending programmes, supplement employees’ income and reduce businesses’ tax-wedge (the difference between before-tax and after-tax wages) on labour. These allocations would increase and sustain a higher level of domestic demand and improve business competitiveness. As a result, the FM group believes Italy’s output gap would close without affecting the country’s external balance.
We realise that the FM initiative is a controversial one on which some economic pundits belonging to the pro-austerity crowd (including in Italy) have voiced disagreement. We have put the initiative forward to an international audience to show how Italy could return to sustainable growth without a further dose of austerity.
According to the International Financial Reporting Standards, FM securities would not constitute debt, since the issuer would be under no obligation to reimburse them in future. The European System of Accounts would treat them as ‘non-payable deferred tax assets’, meaning FM securities would not be recorded in the budget until used for tax rebates, two years after issuance. In the meantime, the new spending would stimulate output and new fiscal revenues.
A gradual issuance of FM securities starting in 2019, reaching €100bn in 2021 (against Italy’s total fiscal revenue of around €800bn) and continuing steadily thereafter would raise annual GDP growth to 3% in 2019-2021 and between 1.5% and 2% thereafter. This would generate sufficient tax revenues to offset rebates coming due.
If the programme temporarily underperformed, policy-makers could activate safeguard measures and restore fiscal compliance. This could be achieved by financing select public investment with FM (instead of euros), raising taxes and simultaneously allocating additional FM securities, incentivising FM holders to reschedule their use for tax rebates by enhancing their value, and placing FM securities in the market (in exchange for euros). These measures would raise the needed euro-cash while avoiding procyclical effects. Importantly, they would prevent market uncertainties. Moreover, the high cover-ratio (between government gross receipts and tax rebates coming due) would make them sustainable.
By activating an FM programme, Italy would reinvigorate growth without asking for European treaty revisions, financial transfers from other countries or recourse to capital markets. Public debt would start declining relative to GDP, while the sustained level of aggregate demand would benefit productivity and long-term growth (both of which have declined after decades of public and private investment contraction). In an economy like Italy’s with large resource slack, the multiplier and investment accelerator work their effects largely on output and moderately on prices. As external leakages would be contained through increased competitiveness, the impact on domestic demand would be the largest.
FM would mobilise unutilised resources, accelerate investment and induce banks to resume lending in a national economy that has lost monetary sovereignty and exhausted the space for conventional active fiscal policy. FM is not a step towards a possible Italian exit from the euro area. It would integrate existing financial assets, not replace them, and the euro would remain Italy’s unit of account. Fiscal money would be a way of addressing the chronicling underperforming state of Italy’s economy, while keeping the country firmly within the euro.
Biagio Bossone, Marco Cattaneo, Massimo Costa, and Stefano Sylos Labini are Members of the Group of Fiscal Money, Italy.