Pontignano 2011_DemocracyPublic debt and private growth

Democracy, Debt and Growth
XIX Pontignano Conference
Rome, September 24th 2011

Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 1
Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved.
Objectives of this document
This workshop is about if and how democracies can find a sustainable way out of current
debt burden
• While austerity and (some) restructuring might be unavoidable, a sustainable cocktail will need
to include a component of growth
This short document offers some background for the workshop
• Some thoughts and modeling on potential paths for reduction of debt
• Some comparisons between UK and Italy policy mixes
• A few thoughts on roots of growth
Goal of the workshop is generating three proposals or ideas, on if and how democracies
could cope with debt
• To be shared in the plenary sessions – together with outcomes from other workshops

Agenda
Debt and growth
UK and Italy: two policy mixes
Discussion starters

The starting point
Source:OECD, 2010 forecast data; BCG Analysis
Government
gross financial
liabilities
(US$2,500B)
Outstanding government debt (% GDP)
Deficit 2010 (% GDP)
More dangerous ?
Deficit too high
Debt too high Japan
0
30
60
90
120
150
180
210
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Eurozone
Public-sector debt and deficits
Reinarth-Rogoff
Threshold

Inflation
Inflate
economy to
reduce real
and nominal
debt value
4
In principle, four options to reduce debt
Austerity
Starve the
Monster
through a
policy of
austerity
Growth
Boost
economic
growth to
generate
resources for
repayment
1
2
Restructuring
Renegotiate
debt to gain
time and/or
reduce the
burden
3

In practice, any path will face challenges
Growth surplus
(Nominal GDP growth-Nominal Interest Burden)
Current Growth
Gap1% 3% 5%
U.S. 38 13 8 -1.1%
Japan 70 24 14 -0.3%
Germany 12 4 2 -0.1%
France 20 7 4 -2.2%
U.K. 37 12 8 0.6%
Italy 28 10 6 -2.3%
Spain 44 15 9 -3.2%
Greece
29 10 6
-6.4%
Portugal 58 19 12 -5.3%
Ireland 82 28 17 -7.2%
Number of years to sustainability
Government debt Debt, nonfinancial companies Debt, households
Debt/GDP (%)
139
66
97
237127
207
58 52
275
121
53
312
236
135 86
116 77
76
42
25672
218
9985
393
8678 54
20273 65 63
351194
77 96
95
84 257
62
1. Sustainability is assumed to be a Total Debt/GDP ratio equal to 180%. 2: Based on 2009/2010 data
Sources: OECD, 2009 data; BCG analysis.
2
1

"Ideology" divide in democracies – only makes things worse
Inflation
Inflate
economy to
reduce real
and nominal
debt value
4
Growth
Boost
economic
growth to
generate
resources
for
repayment
1
"Acceleration of growth through increased
competitiveness, will take care of most crucial
and urgent debt issues"
"Pan-european austerity can only add to
recession, and will surely make debt burden
even worse"
"Low-debt countries need to face it : their only
alternative to socializing debt, consists of EU
meltdown, and even bigger losses"
"ECB and EU need to realize, matching US on
more accomodative policies is the only option
currently available"
Austerity
Starve the
Monster
through a
policy of
austerity
2
Restructuring
Renegotiate
debt to gain
time and/or
reduce the
burden
3
"No point in pursuing growth in mature
economies, it is against the headwind of
megatrends (ageing, end of innovation wawes,
rigidity)"
"Postponing cuts and/or some kind of default,
will only make things worse, austerity needs
to take place immediately, and be deep"
"Helping high-debt countries in any way that
divert their priority from budget cuts, is
unethical"
"Several experiences from northern Europe
indicate deep austerity as the only effective
way out"

Agenda
Debt and growth
Discussion starters

Both countries had to cope with deficit reduction
In scope of following pages
July – October1
2010
July –September2
2011
Ordinary
budget law
Emergency
budget law
€ 145 Bln€ 38 Bln
May
2010
June
2010
October
2010
March
2011
Elections Special
budget law
Spending
review
Ordinary
budget law
£ 0.03 Bln£110 Bln
1. Includes the pre-budget law document (July 2010) and the final budget law document (October 2010) 2. Includes the two emergency budget laws
Note: The total balance is the sum of the single yearly balance along the period of intervention

Total budget balance
Two different mixes (I)
Forecast
1. Conversion at 1.147 € per £
Source: for Italy: the Senate of the Republic; for UK: HM Treasury; BCG analysis
40
30
50
60
€ Bilion
60
20
20
10
39
2013
0
2014
54
19
35
2012
28
8
21
2011
3
0
3
2010
0
0 0
98
47
€ Bilion
60
90
120
30
150
0
UK
1261
88
38
IT
145
Net expenditure reduction
Net tax increase
0
20
30
40
60
£ Bilion
50
38
8
14/15
10
13/14
30
30
22
12/13
922
15
7
11/12
13
7
6
10/11
6
3
3

Two different mixes (II)
Forecast
44
14
38
48
% on GDP
54
52
42
46
50
40
0100 070605040302 131211100908
Revenues
Expenditure
Source: Italy: OECD until 2010 and the Senate of the Republic for forecasts; UK: HM Tresury
00 1009 1208070605 11’04030201
36
1413
54
52
50
40
44
48
38
42
46
% on GDP

Two different mixes (III)
Total
Balance
Net tax
increase
Net
expenditure
reduction
Tax
increase
Expenditure
reduction
Tax
reduction
Expenditure
increase
Total
Balance Net mix
ƒ
ƒ
ƒ
Total balance reduction
Total balance increase
Source: for Italy: The Senate of the Republic; for UK: HM Treasury; BCG analysis
1. € Billion, total impact along the entire 2010-14 period. 2. In 2014 the government is required to find a 20 billion spending cut; in case this doesn't happen, 20 Billion will be guaranteed by enhancing
the allowances reduction 3. Of which -8 billion from health care system saving, and -4 billion from welfare savings 4. Institute for research in economics and politics. 5. £ Billion, total impact along the
entire 2010-14 period. 6. tax on the value of all of the debts of banks; it is structured to discourage banks from relying on risky forms of borrowing 7. National Insurance Contribution. 8. The NHS
committed to make up to £ 20 billion of annual efficiency saving by the end of 2014-15
Measure Impact1
1. Municipalities transfer reduction
2. Central administration optimization
3. Spending for Ministries reduction
4. Others
Subtotal
17
15
8
18
58
-5
-2
-4
-11
1. ISPE4 found
2. Local public transport fund
3. Others
Subtotal
Total 145
Measure Impact5
-15
-14
-6
-8
-43
1. Personal allowance
2. NIC7 threshold increase
3. Corporate tax decrease
4. Others
Subtotal
1. Health care system savings
2. Switch to CPI indexation
3. Tax credit reform
4. Others
Subtotal
208
13
10
47
90
-7
-3
-10
1. Child tax credit increase
2. Others
Subtotal
Total 110
1. Allowances reduction2
2. VAT increase to 21% (from 20%)
3. Tax increase on cigarettes / oil
4. Others3
Subtotal
40
13
13
34
100
1. VAT increase to 20% (from 17.5%)
2. Bank Levy6
3. Capital allowances decrease
4. Others
Subtotal
54
8
5
9
76
-2
-2
1. Others
Subtotal

Can policies feed the roots of growth ?
Population Productivity
Participation Demography Innovation Efficiency
Women
Elderly and Youth
Working time
…
Immigration
Aging
Family structure
…
Digital
Green
Knowledge/
Education
…
Regulation/
Simplification
Infrastructure/
logistics
Private & Public
Investments
…
• Cohesion and support (social, political)
• Quality of decision processes
• Growth-promoting behaviours (individual, collective)
Growth

Potential engines : the digital economy ?
% of GDP
10.0%
4.0%
6.0%
2.0%
0.0%
CAGR
+9.6%
CAGR
12.8%
UK
9.9%
7.2%
Italy
3.3%
1.9%
8.0%
2015e2009
The Internet Economy
expected development
Source: BCG reports "Connected Kingdom", "Fattore Internet", "Turning Local"
The e-Intensity Index
2000
Italy
#21
UK
#14
86
South
Corea
#1
35
Denmark
#2
UK
#1
0
Italy
#27
200 200
60
Italy
#27
Norway
#1
UK
#12
0
Enablement Expenditure Engagement

Potential engines : the sustainable economy ?
LCEGS1 industries' revenue2 and growth
Sales increase 2008/09 (%)
38,0
24,0
15,5
6,0
3,5
3,0
2,5
2,0
1,5
1,0
Number of companies (k)
110010009008007006005004003002001000
4
Wave & Tidal
8
Marine Pollution Control
7 Environmental Monitoring
10
Noise & Vibration control
21
Carbon Capture & Storage
21
Hydro
27
Renewable consulting
37
Environmental
Consultancy
42
Contaminated Land
Reclamation & Remediation
43
Air Pollution
66 Additional Energy sources
74 Carbon Finance
114 Energy Management
219 Biomass
222
Waste
Management
224 Photovoltaic
291
Recovery and Recycling
368
Water Supply and
Waste water Treatment
433
Geothermal
525Alternative Fuel Vehicle
552 Wind
606Building Technologies
876
Alternative Fuels
Environmental
Renewable
Low carbon
2008/09
World GDP
growth (1,7%)
2008/09 LGE
average
growth (3,1%)
Sales (USD Bn)
1. Low Carbon and Environmental Goods and Services
2. USD/GBP exchange rate:1,52USD/GBP (as per March, 2010)
Source: INNOVAS and UK Government Department for Business, Enterprise and Regulatory Reform, 2010

Agenda
Debt and growth
Discussion starters

Discussion starters
• Is the current burden of debt as a real threat for our democracies ? And if yes, where are the
biggest dangers coming from ?
• Is growth part of the solution ? Or is growth just a dangerous illusion in mature economies ?
• If growth is part of the solution, what are the most promising levers to promote it ? And, are
there any growth stimulating levers capable of producing an impact in the short term ?
• To which extent are current policy mixes in UK, Italy and EU, stimulating growth ? What is
missing or inappropriate ? How should they change ?
• Any cocktail of policies, with or without growth, will require much stronger social and political
cohesion that we observe today, and stronger leadership. How can democracies generate
such cohesion and leadership ?
• As for UK and Italy – what are the most promising ways to create social cohesion around debt-
reducing and/or growth-promoting policies ? How can constructive behaviors be stimulated ?

Alternative and/or additional proposals : Italy
1. "Shielded capitals" are those capital that, paying a 5% tax, have been allowed to come back to Italy from abroad without any kind of control on their source 2. Possibility for citizens to monitor PA
efficiency and productivity 3. Thanks to black economy, ineffective companies compete with fair companies 4. Finaced thanks to age retirement increase
Budget
measures
Growth
stimulus
Democratic Party Sole 24 Ore Zingales & Perotti R. Abravanel
1. Strong and effective policy
against black economy
2. (Strongly) progressive taxation
on housing properties
3. "Una tantum" taxation for
"shielded capitals"1
4. Political system cost reduction:
little towns and provinces
grouping
5. Liberalization:
a) Professional services
b) Drug distribution
c) Oil supply chain
d) Insurance
e) Banking services
f) Energy network
g) Local public services
6. State property selling
7. Competitive auction for TV wave
band
8. Financing entrepreneurial
projects involving high
percentage of women and young
people
9. Increase law penalties for false
accounting
10. Justice system improvement
1. University tuition fees increase
2. Personal income taxation
reduction
3. Stability agreement for sanitary
expenses
a) Members of parliament
and salary reduction
b) Little towns and
provinces grouping
5. Retirement age increase (70
years) before 2020
6. Professional services
liberalization and Antitrust
authority power enhancement
7. Privatization (starting from):
a) Public TV channels
(RAI)
b) Municipally-owned
company in the utility
industry
8. Eurobond adoption
9. "Freedom information act"2 for
public administration
1. University tuition fees increase
2. Income tax surtax
3. Cutting company subsidies and
incentives
4. Elimination of grandiose and
useless projects
5. Cutting the highest public
salaries
a) Provinces abolition
b) Members of parliament
salary, number and
retirement benefit
reduction
7. Cutting of inequitable pensions
and other pension measures
8. Privatization:
a) Public TV channels
(RAI)
b) State owned company
(ENI, Enel,
Finmeccanica,,..)
c) Banking foundations
9. Privatization of Municipally-
owned company in the utility
industry
10. Banking foundations privatization
1. More taxation only from effective
battle against black economy to:
a) Reduce deficit
b) Boost productivity3
2. VAT increase
3. Retirement age increase to 65
from next year, and then up to 67
4. Labor market reform:
1. Firing law revision
2. Unemployment fund4
5. Corporate tax reduction

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