Thursday, April 19, 2012

A Moving Target

Said Monti: "I honestly never knew,
When to balance the books I endeavored too,
How austerity tends
To lower the trends
Of output and government revenue."

Italy announced that it would not meet the 2013 balanced budget pledge that it made as part of the EU fiscal stability pact. It's not that the "technocratic" government of Prime Minister Mario Monti isn't committed to cutbacks; more so that a downwardly revised GDP forecast is undercutting the revenue side of the balance. The Italian economy, which had been forecast to shrink by 0.5% next year, now has a revised GDP growth outlook of -1.2%. Thus, a projected balanced budget has turned into a deficit equal to -0.5% of GDP. Unfortunately, by tightening fiscal policy in a recession, the government is making things worse. However, they are operating under constraints set by the European Union, and thus had no choice in the matter.

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