11155.docx

Fiscal Policy tools used in the past: Two main austerity packages have been taken by the government of Italy since the financial crisis of 2008. An austerity package is one in which the government cuts back on spending and finds ways to raise revenues, such as raise and create taxes. Since government spending decreases and tax revenues increase, an austerity package is the perfect example of a contractionary fiscal policy. It is probably puzzling as to why Italy’s government is implementing a contractionary fiscal policy in a pretty stagnant economy, but the reason why is the deficit. A contractionary policy helps to fight any budget deficit, and ultimately the public debt, since spending is halted and raising revenues begins. This plan is not ideal financially for citizens, but it does help the government tremendously. Primarily, Italy’s government hopes to raise funds to pay off the massive debt that is hovering over Italy, by tax increases, cuts in aid to local governments, creating a higher age for retirement of woman in the private sector, and changing labor laws so that hiring and firing are easier. As Europe’s third-largest economy and the world’s seventh-largest economy, it is crucial that this austerity plan functions properly. But despite this, the government debt of Italy has kept on increasing over the years. (Reason if asked why austerity package didn't work: a low price. With a decrease in production, there will be a decrease in the need for employees, resulting in a rise of the unemployment rate, leaving macroeconomic goal number three, low unemployment, inaccurate. In summary, an austerity package, or contractionary policy, will cause prices to fall, which will in turn cause productivity to plummet, resulting in a high unemployment rate, all while ideally shrinking the public debt to a tolerable number)

New Fiscal Policy (PASSED): The Italian elections held earlier this year eventually produced a coalition government between two parties generally perceived to have a populist tilt: the Five Star Movement (5SM) and the Lega (the League). Both parties have expressed some Euroscepticism and a strong desire to enact expansionary fiscal policies. The key number was a deficit target of 2.4% of GDP for 2019, above the 0.8% target set by the previous government back in April. The 2.4% target still technically complies with the 3% limit imposed by the European Union (EU), but given Italy’s large stock of debt EU policymakers may still be wary. If that deficit target is realized, nominal GDP would have to grow at roughly a 3% pace next year to keep the debt-to-GDP ratio steady, a key factor given that Italy is already in clear violation of the EU’s limit of a 60% debt- to-GDP ratio. While 3% is a bit faster than the current 2.7% pace, it is at least a feasible outcome. Italy's parliament has approved a revised budget for 2019, amid opposition complaints that it was dictated by the EU. The country's populist government had originally vowed to push through costly campaign promises including a universal basic income. But in October, the European Commission raised concerns about the impact of such spending on Italy's debt levels. Under a deal struck with the Commission last week, Italy lowered its planned budget deficit from 2.4% of GDP to 2.04% - less of a reduction than European officials had hoped for. Italy's coalition government, made up of the anti-establishment Five Star Movement and right-wing League, has pledged the following: 1) A new income support scheme known as the "citizens' wage" will pay €780 ($890; £700) a month to 1.7 million of Italy's poorest families. The measure is forecast to cost €7.1bn. 2) The retirement age will be cut from the current 67 to 62, for workers who have paid into the pension system for 38 years. 3) More than a million self-employed workers earning under €65,000 a year will see their taxes cut to 15%.

Monetary Policy:

Italy is a member of the European Union and hence has to abide by the monetary policy devised by the ECB. In 2018, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Though the interest rates were low, there has been low production because of low domestic demand. Inventories have been going down. SME haven't been able to pay back the banks because of low domestic demand and high taxes act as an added burden. Demand is backed by low employment.

Challenges Faced

1) The first failure to form a government, late in May, suddenly brought on a loss of confidence. People feared that a new election would bring even less responsible government than the coalition promised. But the coalition government was formed after reaching an agreement. 2) A year after the elections in 2018, the Italian Deputy Prime Minister Matteo Salvini is facing pressure to force an early election in 2019r from lieutenants frustrated by dealing with an unruly coalition partner. Several senior members of Salvini’s League are urging their chief to capitalize on a growing lead in opinion polls to ditch the anti-establishment Five Star Movement which is hampering their efforts to deliver on election promises, according to a League government member and a senior party official who asked not to be named discussing confidential deliberations.