Pontignano 2011_DemocracyPublic debt and private growth

Democracy, Debt and GrowthXIX Pontignano Conference

Rome, September 24th 2011

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 1

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Objectives of this document

This workshop is about if and how democracies can find a sustainable way out of current debt burden

• While austerity and (some) restructuring might be unavoidable, a sustainable cocktail will need to include a component of growth

This short document offers some background for the workshop• Some thoughts and modeling on potential paths for reduction of debt• Some comparisons between UK and Italy policy mixes• A few thoughts on roots of growth

Goal of the workshop is generating three proposals or ideas, on if and how democracies could cope with debt

• To be shared in the plenary sessions – together with outcomes from other workshops

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 2

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Agenda

Debt and growth

UK and Italy: two policy mixes

Discussion starters

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 3

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The starting point

Source:OECD, 2010 forecast data; BCG Analysis

Government gross financial liabilities (US$2,500B)

Outstanding government debt (% GDP)

Deficit 2010 (% GDP)

More dangerous ?

Deficit too high

Debt too high Japan

0

30

60

90

120

150

180

210

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Eurozone

Public-sector debt and deficits

Reinarth-RogoffThreshold

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Inflation

Inflate economy to reduce real and nominal debt value

4

In principle, four options to reduce debt

Austerity

Starve the Monster through a policy of austerity

Growth

Boost economic growth to generate resources for repayment

1

2

Restructuring

Renegotiate debt to gain time and/or reduce the burden

3

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 5

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In practice, any path will face challenges

Growth surplus (Nominal GDP growth-Nominal Interest Burden)

Current GrowthGap1% 3% 5%

U.S. 38 13 8 -1.1%

Japan 70 24 14 -0.3%

Germany 12 4 2 -0.1%

France 20 7 4 -2.2%

U.K. 37 12 8 0.6%

Italy 28 10 6 -2.3%

Spain 44 15 9 -3.2%

Greece 29 10 6

-6.4%

Portugal 58 19 12 -5.3%

Ireland 82 28 17 -7.2%

Number of years to sustainability

Government debt Debt, nonfinancial companies Debt, households

Debt/GDP (%)

139

66

97

237127

207

58 52

275

121

53

312

236

135 86

116 77

76

42

25672

218

9985

393

8678 54

20273 65 63

351194

77 96

95

84 257

62

1. Sustainability is assumed to be a Total Debt/GDP ratio equal to 180%. 2: Based on 2009/2010 dataSources: OECD, 2009 data; BCG analysis.

2

1

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 6

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"Ideology" divide in democracies – only makes things worse

Inflation

Inflate economy to reduce real and nominal debt value

4

Growth

Boost economic growth to generate resources for repayment

1

"Acceleration of growth through increasedcompetitiveness, will take care of most crucialand urgent debt issues"

"Pan-european austerity can only add torecession, and will surely make debt burdeneven worse"

"Low-debt countries need to face it : their onlyalternative to socializing debt, consists of EU meltdown, and even bigger losses"

"ECB and EU need to realize, matching US on more accomodative policies is the only optioncurrently available"

Austerity

Starve the Monster through a policy of austerity

2

Restructuring

Renegotiate debt to gain time and/or reduce the burden

3

"No point in pursuing growth in mature economies, it is against the headwind ofmegatrends (ageing, end of innovation wawes, rigidity)"

"Postponing cuts and/or some kind of default, will only make things worse, austerity needsto take place immediately, and be deep"

"Helping high-debt countries in any way thatdivert their priority from budget cuts, isunethical"

"Several experiences from northern Europeindicate deep austerity as the only effectiveway out"

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 7

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Agenda

Debt and growth

UK and Italy: two policy mixes

Discussion starters

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 8

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Both countries had to cope with deficit reduction

In scope of following pages

July – October1

2010July –September2

2011

Ordinarybudget law

Emergency budget law€ 145 Bln€ 38 Bln

May2010

June2010

October2010

March2011

Elections Special budget law

Spending review

Ordinarybudget law£ 0.03 Bln£110 Bln

1. Includes the pre-budget law document (July 2010) and the final budget law document (October 2010) 2. Includes the two emergency budget lawsNote: The total balance is the sum of the single yearly balance along the period of intervention

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 9

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Total budget balance

Two different mixes (I)

Forecast

1. Conversion at 1.147 € per £Source: for Italy: the Senate of the Republic; for UK: HM Treasury; BCG analysis

40

30

50

60

€ Bilion60

20

20

10

39

2013

0

2014

54

19

35

2012

28

8

21

2011

3

0 3

2010

00 0

98

47

€ Bilion

60

90

120

30

150

0UK

1261

88

38

IT

145

Net expenditure reductionNet tax increase

0

20

30

40

60

£ Bilion

50

38

8

14/15

10

13/14

30

30

22

12/13

922

15

7

11/12

13

7

6

10/11

6

33

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Two different mixes (II)

Forecast

44

1438

48

% on GDP54

52

42

46

50

40

0100 070605040302 131211100908

RevenuesExpenditure

Source: Italy: OECD until 2010 and the Senate of the Republic for forecasts; UK: HM Tresury

00 1009 1208070605 11’0403020136

1413

54

52

50

40

44

48

38

42

46

% on GDP

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 11

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Two different mixes (III)

Total Balance

Net tax increase

Net expenditure

reduction

Tax increase

Expenditure reduction

Tax reduction

Expenditure increase

Total Balance Net mix

ƒ

ƒ

ƒ

Total balance reduction

Total balance increase

Source: for Italy: The Senate of the Republic; for UK: HM Treasury; BCG analysis1. € Billion, total impact along the entire 2010-14 period. 2. In 2014 the government is required to find a 20 billion spending cut; in case this doesn't happen, 20 Billion will be guaranteed by enhancing the allowances reduction 3. Of which -8 billion from health care system saving, and -4 billion from welfare savings 4. Institute for research in economics and politics. 5. £ Billion, total impact along the entire 2010-14 period. 6. tax on the value of all of the debts of banks; it is structured to discourage banks from relying on risky forms of borrowing 7. National Insurance Contribution. 8. The NHScommitted to make up to £ 20 billion of annual efficiency saving by the end of 2014-15

Measure Impact1

1. Municipalities transfer reduction2. Central administration optimization3. Spending for Ministries reduction4. OthersSubtotal

17158

1858

-5-2-4

-11

1. ISPE4 found2. Local public transport fund3. OthersSubtotal

Total 145

Measure Impact5

-15-14-6-8

-43

1. Personal allowance2. NIC7 threshold increase3. Corporate tax decrease4. OthersSubtotal

1. Health care system savings2. Switch to CPI indexation3. Tax credit reform4. OthersSubtotal

208

13104790

-7-3

-10

1. Child tax credit increase2. OthersSubtotal

Total 110

1. Allowances reduction2

2. VAT increase to 21% (from 20%)3. Tax increase on cigarettes / oil4. Others3

Subtotal

40131334

100

1. VAT increase to 20% (from 17.5%)2. Bank Levy6

3. Capital allowances decrease4. OthersSubtotal

54859

76

-2-2

1. OthersSubtotal

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Can policies feed the roots of growth ?

Population Productivity

Participation Demography Innovation Efficiency

Women

Elderly and Youth

Working time

…

Immigration

Aging

Family structure

…

Digital

Green

Knowledge/ Education

…

Regulation/ SimplificationInfrastructure/

logisticsPrivate & Public

Investments

…

• Cohesion and support (social, political)• Quality of decision processes• Growth-promoting behaviours (individual, collective)

Growth

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 13

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Potential engines : the digital economy ?

% of GDP10.0%

4.0%

6.0%

2.0%

0.0%

CAGR+9.6%

CAGR12.8%

UK

9.9%

7.2%

Italy

3.3%

1.9%

8.0%

2015e2009

The Internet Economy expected development

Source: BCG reports "Connected Kingdom", "Fattore Internet", "Turning Local"

The e-Intensity Index

2000

Italy#21

UK#14

86

SouthCorea

#1

35

Denmark#2

UK#1

0

Italy#27

200 200

60Italy#27

Norway#1

UK#12

0

Enablement Expenditure Engagement

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 14

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Potential engines : the sustainable economy ?LCEGS1 industries' revenue2 and growth

Sales increase 2008/09 (%)38,0

24,0

15,5

6,0

3,5

3,0

2,5

2,0

1,5

1,0

Number of companies (k)110010009008007006005004003002001000

4Wave & Tidal

8

Marine Pollution Control7 Environmental Monitoring

10Noise & Vibration control

21Carbon Capture & Storage

21Hydro

27Renewable consulting

37

Environmental Consultancy

42

Contaminated Land Reclamation & Remediation

43Air Pollution

66 Additional Energy sources

74 Carbon Finance

114 Energy Management

219 Biomass

222 Waste Management

224 Photovoltaic

291

Recovery and Recycling

368 Water Supply and Waste water Treatment

433

Geothermal

525Alternative Fuel Vehicle

552 Wind

606Building Technologies876

Alternative Fuels

EnvironmentalRenewableLow carbon

2008/09 World GDP

growth (1,7%)

2008/09 LGE average

growth (3,1%)

Sales (USD Bn)

1. Low Carbon and Environmental Goods and Services2. USD/GBP exchange rate:1,52USD/GBP (as per March, 2010)Source: INNOVAS and UK Government Department for Business, Enterprise and Regulatory Reform, 2010

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 15

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Agenda

Debt and growth

UK and Italy: two policy mixes

Discussion starters

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 16

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Discussion starters

• Is the current burden of debt as a real threat for our democracies ? And if yes, where are the biggest dangers coming from ?

• Is growth part of the solution ? Or is growth just a dangerous illusion in mature economies ?

• If growth is part of the solution, what are the most promising levers to promote it ? And, are there any growth stimulating levers capable of producing an impact in the short term ?

• To which extent are current policy mixes in UK, Italy and EU, stimulating growth ? What is missing or inappropriate ? How should they change ?

• Any cocktail of policies, with or without growth, will require much stronger social and political cohesion that we observe today, and stronger leadership. How can democracies generate such cohesion and leadership ?

• As for UK and Italy – what are the most promising ways to create social cohesion around debt-reducing and/or growth-promoting policies ? How can constructive behaviors be stimulated ?

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 17

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Alternative and/or additional proposals : Italy

1. "Shielded capitals" are those capital that, paying a 5% tax, have been allowed to come back to Italy from abroad without any kind of control on their source 2. Possibility for citizens to monitor PA efficiency and productivity 3. Thanks to black economy, ineffective companies compete with fair companies 4. Finaced thanks to age retirement increase

Budget measures

Growth stimulus

Democratic Party Sole 24 Ore Zingales & Perotti R. Abravanel1. Strong and effective policy

against black economy2. (Strongly) progressive taxation

on housing properties3. "Una tantum" taxation for

"shielded capitals"1

4. Political system cost reduction: little towns and provinces grouping

5. Liberalization:a) Professional servicesb) Drug distributionc) Oil supply chaind) Insurancee) Banking servicesf) Energy networkg) Local public services

6. State property selling7. Competitive auction for TV wave

band8. Financing entrepreneurial

projects involving high percentage of women and young people

9. Increase law penalties for false accounting

10. Justice system improvement

1. University tuition fees increase2. Personal income taxation

reduction3. Stability agreement for sanitary

expenses4. Political system cost reduction:

a) Members of parliament and salary reduction

b) Little towns and provinces grouping

5. Retirement age increase (70 years) before 2020

6. Professional services liberalization and Antitrust authority power enhancement

7. Privatization (starting from):a) Public TV channels

(RAI)b) Municipally-owned

company in the utility industry

8. Eurobond adoption9. "Freedom information act"2 for

public administration

1. University tuition fees increase2. Income tax surtax3. Cutting company subsidies and

incentives4. Elimination of grandiose and

useless projects5. Cutting the highest public

salaries6. Political system cost reduction:

a) Provinces abolitionb) Members of parliament

salary, number and retirement benefit reduction

7. Cutting of inequitable pensions and other pension measures

8. Privatization:a) Public TV channels

(RAI)b) State owned company

(ENI, Enel, Finmeccanica,,..)

c) Banking foundations9. Privatization of Municipally-

owned company in the utility industry

10. Banking foundations privatization

1. More taxation only from effective battle against black economy to:

a) Reduce deficitb) Boost productivity3

2. VAT increase3. Retirement age increase to 65

from next year, and then up to 67

4. Labor market reform:1. Firing law revision2. Unemployment fund4

5. Corporate tax reduction