Information, deficit, and the markets

Markets are nervous, and I fully understand them. The information they receive from Italy is sometimes frightening! However, I would invite them to take it with a grain of salt.

Consider for instance this article published by Reuters a few hours ago. I will just focus on one among many questionable things: the idea that the Italian government plans “to triple the deficit next year, backtracking on a previous pledge to narrow the budget gap”.

I tried to read this sentence with the eyes of an international investor who is understandably unaware of the key facts and figures of the Italian economy, and knows little or nothing about how the budget law is written, discussed and approved.

Taken at face value, these words mean that the Italian government has decided to triple the budget deficit in 2019 with respect to the value prevailing this year. The latter is still unknown for obvious reasons, but is likely to be 1.8% of GDP according to most estimates (including those of the government). Since 1.8x3=5.4, international investors could conclude that the Italian Government plans to expand its budget deficit over 5% of GDP. Their worries would be fully justified.

Fortunately, everybody knows that the correct figure is 2.4, less than half the figure suggested by Reuters. Where does the “tripling” come from then? A little background information is needed. The Economic and Finance Document (EFD, in Italian DEF) sets a triennial plan for Italy’s budget policy, where a baseline scenario (the so called “tendenziale”, i.e. the trend without any policy change) is compared with a counterfactual scenario (the so called “programmatico”, i.e. a scenario that takes the Government economic programme into account). Now let us unwind the alleged “tripling” by taking 2.4 (the correct figure) and dividing it by 3: 2.4/3=0.8.

The markets may have forgotten this figure. I have not, because last May I reported the EFD to the Senate of the Italian Republic: 0.8 was the budget deficit to GDP ratio in the “tendenziale” proposed by the previous government.

The Reuters report is therefore still incorrect in at least two respects. Firstly, because it would be pointless to compare a “tendenziale” (and incidentally, not updated) with a “programmatico”. In other words, nobody knows what the Democratic Party would have done in September if it still was in office. We have enough elements to suspect that it would have increased its September “programmatico” with respect to its May “tendenziale”, as in many other cases, but this is a moot question. No sensible comparison is possible between our 2.4 and their 0.8. The second reason why the Reuters report is incorrect is because the present Government was not in office in April: it is therefore in any case incorrect to say that it is “backtracking”. The Italian government did not backtrack: it changed. I suspect that this may hurt someone at Reuters, and I am sorry for this, but it’s not my fault: it’s democracy.

To make a long story short: there was no tripling, there was no backtracking. There is a huge problem with the quality of information. Information, even more than money, is the most valuable raw material for people working in the markets. I hope those people are aware of the problem, and there is some evidence they actually are.