Today 5 million Italians live in extreme poverty in an economy that suffers from chronically low growth and high public debt. But let’s not worry too much about that, the new populist government came up with a very simple solution. During their electoral campaign, the 5 Star Movement proposed the implementation of a basic income for those families who live below the poverty line. The leaders of the movement believe that this measure will fight poverty, inequality and social exclusion, guaranteeing access to jobs, adequate education and information. Sounds like real development!
This is how it works. The state gives a special card, charged with €780 every month, to any Italian or European who have a difficult financial situation and meet particular requirements (such as limited financial and capital assets). In the meantime, these people will also be reintroduced to the labor market through specialized centers that will provide training programs to those who need to be trained and will guide to job opportunities those who are already qualified. This project also includes incentives for enterprises to hire the beneficiaries of this basic income. The enforcement will be strict: those who cheat risk 2-6 years in prison. So far so good.
The sad truth is that usually “an affordable UBI is inadequate, and an adequate UBI is unaffordable”. The problem is also that in the case of Italy, the basic income is neither one or the other. This reform would approximately cost €9 billion every year, an expenditure that is not affordable for an economy with a public debt of 132% of GDP. Ignoring that little detail, the populist coalition endorsed a deficit of 2.4% of GDP, three times larger than the 0.8% adopted in the previous years and over the 1.6% limit suggested by the minister of finance.
The expectation behind this reform is that it will create job opportunities for people who will eventually contribute to boost the economy through fiscal stimulus. However, this will only happen in the long run and will require a short-term increase in taxes in a country with one of the highest tax wedges in the OECD. In the meantime, another risk is that the cost of borrowing will rise, increasing the costs of servicing debt for businesses. This will harm the balance-sheet of domestic banks that are the main holders of Italian debt. Another risk that should be considered is the incentivization of undeclared work, which would result in tax evasion which is already particularly high in Italy.
In addition, this reform is also inadequate for the composition of the country. Giving the differences between north and south, €780 is too little for those living in the North and too generous for those living in the South. In the long term, this would contribute to the timeless division of the country, increasing the existing resentment of the North towards the South.
Moreover, the amount of €780 has been established according to the idea of “relative poverty”, that accounts for all those people who have an income that is below the 60% of the median income”, which means that inflation and the performance of an economy are not taken into account in the calculation. This means that this sum will require constant adjustments and political controversies in a country that doesn’t have bureaucratic apparatus that is efficient and responsive enough.
Bottom line: The implementation of a universal basic income is unlikely to succeed given Italy’s weak institutional framework and unaffordable in its even weaker economic situation.
* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).