Originally published on Italics Magazine.
Recently, the Italian government announced that it has decided to take out some fresh new loans in order to finance their many extravagant policies, such as their citizen’s income.
The financial markets have already reacted negatively to the news that made international click-bait headlines as “Italy to introduce basic income” and the likes. However, in defence of the government, they did not propose a universal basic income, but a very basic social support fund that will pay impoverished Italians up to 780 euro per month, on the condition that they will accept any job they are offered and that they will immediately begin work for the government for eight hours per week in some capacity. Similar systems are already in place across Europe and Italy was simply lacking this kind of social net; which the European Commission also pointed out in previous country reports.
More benefits? More costs
So, what exactly is wrong with borrowing money so you can give handouts to your citizens? That is the quintessential point that makes this a populist policy. It looks really good at first glance and anyone that tries to argue with it is automatically demonised as being “against the people”.
However, if we look just a little closer, we soon notice that this policy is not only ineffective, but actually costs citizens money.
We tend to forget that a government doesn’t just exist of its own accords. The only reason government exists is because citizens agree to it and actively fund it with taxes. These taxes are used to pay for all of government’s structures and expenses. When those expenditures rise, taxes rise. Only under extreme conditions does a government take out loans from external sources to cover its budget holes, e.g. if the government really needs to invest into infrastructure to improve the economy, which allows the government to pay back the accumulated debt after the fact. But the debt of a government is always the debt of its citizens.
From a government’s perspective, taking out a loan on behalf of your citizens to pay your citizens makes absolutely no sense. If you would like your citizens to have more money to spend, lowering taxation is the best option, particularly because those citizens that are taxed the most, tend to be low to middle-income groups, while only the very rich and the extremely impoverished are spared taxation.
Because we are not talking about basic income, but support for the poor, lowering taxes is not an option. But if the aim is really to get the poor working again, an increase in taxation would be necessary to fund this. Given that Italy’s economy is not doing too well, having only just recovered from the financial crisis and having gone through multiple government changes in short succession, that would also be a bad idea at this juncture. Not to mention the fact that the Lega Nord actually wants to switch to a flat tax model, which would actually reduce the amount of money the government had at its disposal. But is raising the debt level really a viable option?
The troublesome legacy of governments
Social policies such as the ‘citizen’s income’ are not the same as one-off investments in infrastructure. They require a continuous flow of money on an annual basis. In other words, the funding sources need to be sustainable, or the government needs to have other programmes in place that will automatically generate the appropriate income to balance out the expenditures. Taking out a loan is not sustainable, as it means that the Italian government will be forced to take out new loans every year on top of the old loans (and interest) to sustain its programmes. Most likely, the parties currently in charge expect to be gone by then and leave the financial meltdown to whichever mainstream party gets elected after them, so that they can also blame them for the mess they themselves created right now.
Are there alternatives to the current government plans? Yes, though they are complicated. They would involve well thought out reforms in different sectors that would make government more efficient and save money long-term, enabling new policies like the citizen’s income to last. Unfortunately, that is the difference between good governance and populism: one is complex and takes a long time to implement, the other is quick, easy, and appealing, but ultimately will leave the country worse off than it was before.