Debt Redemption – Public Expenditure – Level of Taxation

«The Economist», 16 marzo 1929, p. 571

Turin, March 5

An interesting explanation of the torpid state of Stock Exchange quotations in Italy and the difficulties experienced here in the return to prosperity have been given in the February number of Rivista Bancaria, by Signor Mazzucchelli. Put in a nutshell, the thesis, which has been much discussed, is that the State must increase taxation so as to divert into the exchequer private income which would have been expended, on condition that the exchequer does not spend it, but devotes it to the amortization of public debt. The external war debt is in Italy amortized through the instrumentality of a special fund, into which the German war indemnities are paid. The amortization of the internal public debt is provided for by another special fund, consisting mainly, in addition to various miscellaneous items, of the yearly surpluses of the Budget. Now the opinion is gaining ground that the reduction of public debt must not be limited to the possible surpluses; but that a special increase of taxation should be enacted. Signor Mazzucchelli maintains that the extraordinary prosperity of the United States in after-war years is not to be attributed to plentiful national resources or to the inventiveness of industry, which having always existed, cannot explain the new phenomenon, but to the big reimbursements of public debt which convert a part of current income from expenditure to productive channels. In the same way the rapid recovery from the revaluation and stabilisation in France and Belgium is explained by the same authority as a consequence of the outpouring of taxation money into the capital market through the amortization process. Tax first and amortize next: this is the new financial creed. Some cold water is perhaps thrown on the theory by a perusal of the figures of public income and expenditure. I quote, from the public treasury accounts, the usual double set of figures for the last seven years, adding for comparison’s sake the last pre-war year (in milliards of lire).

The first set proves that equilibrium has come to stay and has not been shaken even by the revaluation crisis. The second set indicates that some expenditures which were budgeted for in past years, and were not paid in the appropriation year (e.g., public works only just completed) are now falling due. The exchequer, which in 1924-25 to 1926-27 paid less than was appropriated, must now pay the arrears. It seems that the present Finance Minister, Senator Mosconi, is accelerating payments of arrears. As arrears are also a debt, their payment reduces public debt just as much as extinction of consols; and if payment is made to creditors for public works or goods sold to the State it should have on the money market about the same effect as reduction of public debt.

It seems doubtful whether it is possible, at the present time, to increase taxation appreciably in order to reduce on a grand scale public debt proper, as distinct from reduction of arrears. Professor Mortara, in the chapter on Finance in his forthcoming Prospettive Economiche, has pointed out that public revenue which appears to have decreased from 21.3 milliards in 1925-26 and 21.4 in 1926-27 to 20.1 milliards in 1927-28 has really increased, if we reduce all figures to the present stabilised lira, from 15.8 milliards in 1925-26 to 17.2 in 1926-27 and to 20.4 in 1927-28. This is a portentous increase of taxation of 29 per cent, in three years. Taxes, apparendy stationary, are much more hard to pay than before revaluation. It is therefore very difficult further to increase taxes on the top of such a hidden increased pressure of public expenditure on national income. Mortara’s guess at the proportion of public (State, local and corporations) taxation to the national income is today 24 per cent, against 12.5 per cent, in 1913-14. Probably there is no other country in the world which has so gallantly faced the consequence of the post-war world in which we live. Italians pay 24 per cent, on an average individual yearly income of £ 23-£ 24; the British 24 per cent, on £ 80; Frechmen 22 per cent, on £ 47; Germans 18 per cent, on £ 51; Americans 7 per cent, on £ 152. As the burden of taxation diminishes with the increase of income, we are bound to conclude that Italian taxpayers cannot easily bear further taxes. Senator Mosconi’s programme of reduction of public expenditure is not only the best suggestion for the reduction of the national debt, but the best also for creating a margin for savings, which is the only road to prosperity.