FAO Economics 1A Students
What follows is an Economics 1a blog (the Eco 1A blog site was disabled a while back)

I continue the intercourse I was having with Pietro during last Monday's lecture.
We both agreed on Berlusconi's eccentricities (euphemistically put) but what of his image as a tax cutting free marketeer? And I wonder what has actually happened to taxes in particular and the Italian economy in general over the last ten years?

The tax take as a % of GDP has varied little showing just a slight rise. In 2000 it was just over 40% and in 2008 stood at around 43%. Some of the rise came from fiscal drag which Italy has famously exploited in the past (fiscal drag is where personal tax allowances are not uprated to allow for inflation so that in real terms you start paying taxes at the basic rate of 23% at lower levels of earnings).
GDP growth per capita has been around about 0.5% and quite poor by historical standards.
Inflation has been steady at around 2.5% (yawn)
What about debt? Not good this one. The debt to GDP ratio has been hovering around the 100% mark this decade (and you thought the UK was bad!) but has grown alarmingly to nearly 110% recently because of the recession.
Unemployment? High by EU standards but falling through the noughties - in 2001 it was just over 9% and in 2008 just over 6%. Perhaps this is the one thing that has changed over the Berlusconi tenure.

But in terms of concrete macro policies what has been implemented?
Well not much - but that's Italy for you. Some Berlusconi policies such as the raising of the retirment age were reversed by Prodi in 06-07. Berlusconi did manage to ease labour market hiring and firing restrictions for new workers but we should be careful before we ascribe the fall in unemployment to this.
In the recent elections he promised to cut tax rates on labour by 1% per year each year (I presume for no more than 23 years!). But his latest fiscal plan commits to increase the tax burden on labour (as a % of earnings) not decrease it.

So what should he do now?
Would it be wise to cut labour taxes now? Well there could be justification for a short term "fiscal" boost on account of the recession (Simon Clark will be lecturing soon about government policy when aggregate demand gets stuck at too low a level to allow full employment) but as noted above debt to GDP is high and growing at an alarming rate. Interestingly even though Italy is in the Euro area - an area where supposedly all governments can borrow at a common interest rate - it is actually having to pay a third of a percent more on new debt issued than Germany does.
There could be long run and permanent effects to output from permanent labour tax cuts but in an economy where these rates are "so-so" the extent and existence of these effects have been difficult to establish.
It might be argued therefore that tax cuts now will generate debtas later. We would be transferring income from future generations to the current one. Given the projections for pensions for future generations compared with the current cohort I am not so sure this would be fair. Then again as the economy grows, future generations do tend to be better off than current ones. Whatever you do on taxes you have to keep an eye on that potentially spiralling debt.

To sum up, I think there have been very few changes in economy policy brought into effect in Italy over the last ten years. Perhaps in the context of Italian politics the best thing a politician can do for his/her country is nothing!