It’s been a fashion lately to compare the UK to Italy. With yields on their government bonds at similar levels, commentators argue that Britain has become as riotous as the southern pizza, pasta and mafia economies.
Tory MPs are confused and Liz Truss has become the human equivalent of Larry the Cat, who lives in Downing Street but exercises no power. Things are getting more and more British: https://t.co/Wf26N0kFPv pic.twitter.com/c1KoKtsMfu
— The Economist (@TheEconomist) October 20, 2022
But fiscal licentiousness is more of a reality for the UK than for Italy in the past twenty years.
British gold prices fell after the outgoing Prime Minister’s announcement of major unfunded tax cuts. Drastic turnarounds on nearly all pledges, a return to austerity and record-breaking defenestration have stabilized markets but shattered reputations.
Meanwhile, Italy awaits its next finance minister following last month’s election victory by Giorgia Meloni’s arch-conservative coalition. Whoever gets the job gains control of a primary government budget, excluding debt interest payments, which have been in surplus for nearly two decades.
This is not the case for the UK, which has been in deficit for most of that period. Without interest payments on the national debt, Italy has even had a budget surplus comparable to that of Germany. It has shown much more austerity than the UK, and above the average of the most industrialized countries.
Current tax deals in the UK would likely align more closely with Italy’s fiscal choices in the 1980s, when rapid increases in government spending were not offset by corresponding increases in revenue, resulting in a rise in government debt.
The build-up of public debt continues to weigh on Italy’s fiscal and economic outlook through the highest payments in the OECD. Coupled with the need for structural reforms, the Italian economy has largely stagnated over the past two decades. This is what is risky for investors about Italy, not the recent fiscal licentiousness.
Not convinced? This is Bert Colijn, senior economist at ING:
Financial market concerns over the UK stem from a very accommodative fiscal policy, despite budget deficits already being high and a trade deficit as a result,” he said. “This is in stark contrast to Italy, which has struggled with high levels of debt from the past since the 1980s and 1990s, when in fact it has been running primary budget surpluses for most of the past two decades.
This means that “Italy has a structural problem of low economic growth and high debt, while the UK’s concerns seem to be mainly related to the very expansive budget proposals,” Colijn said.
Nicola Nobile, an economist at Oxford Economics, agrees. Italy’s problem is “mainly a legacy of previously accumulated debt and a problem stemming from moderate growth.”
Even Italian households do not live beyond their means. Italian households have one of the lowest debt-to-GDP ratios of any advanced economy, well below that of the UK and even lower than that of Germans.
Like the UK, the Italian economy is struggling with weak domestic demand. But her companies are successful exporters that have had a surplus of goods exports in recent decades. The UK has one of the largest current account deficits of the advanced economies, creating uncertainty for investors.
In summary, having quite a lot of commenters preso lucciole by lantern.