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Government transfer’s drawback: evidence from Italy

Governments in developed countries have recently enacted several legislations aimed at encouraging people to spend. From tax reduction to government transfers, several manoeuvres exist to enlarge people’s disposable income and to reduce the poverty rate in the country[1]. However, depending on the characteristics of the citizens, every government should implement ad-hoc policies, focusing on specific group of people/sectors and considering the health of the period of execution.

Since 2014, the left-wing Italian Prime Minister Matteo Renzi has intended to support mainly the low-income families by first implementing tax cuts (e.g. abolition of property-tax on the first residence), then by greasing the job market mechanisms (“Jobs’ act”) and finally by providing tax-bonus to the lower part of the people’s income distribution. The latter, i.e. the tax-credit reform, has created particular interest in the public debate because of its high cost (approximately 10 billion euro per year[2]) and unclear effectiveness. It consists in giving €80- monthly in cash benefit to families with income below €24,000 annually.

In the Country Report Italy 2016, the European Commission has analysed the impact of the 80-euro bonus on society and employment. For what regards the impact on “tax wedge on labour” (ratio between taxes attributed to labour to employment income), data have suggested a decline by 2.3%, on average. Ceteris paribus, household disposable income has increased by around 1.1%. Moreover, as we can see from the table below, positive effects has appeared on poverty rates.

poverty-rate

Impact of the EUR 80 tax credit on poverty rates. Source: European Commission, Joint Research Centre, based on the EUROMOD model, Country Report Italy 2016, pag. 62.

Nonetheless, similarly to what happened in the 60s in USA, when Milton Friedman failed to consider the changing behaviour of people (“negative income tax”) [3], some unexpected drawbacks have risen in Italy as well. Particularly, regarding the implementation of the 80-euro bonus, people have saved more than how much the government had expected ex ante.

Being afraid of losing, likely precarious, job and perceiving tax credit as an increasing tax burden in the future, poorer households have changed their minds with respect to the pre-crisis period. Their propensity to consume has been reduced[4]. That it, when their disposable income grew thanks to the transfer program, in proportion they had more saved than spent the additional credit. In my opinion, one possible solution to avoid this unexpected phenomenon could have been to impose constraint on how and when spending the transfer. Presumably, providing poor families the 80-euro benefit in form of selective (e.g. on subsistence goods) and expiring coupons, rather than in cash, might improve the outcomes of the reform.

To conclude, especially during crisis periods, people entitled to receive a government transfer can behave differently from what policy makers had designed the program for. With in-kind transfer rather than cash, people would be forced to spend the additional money on subsistence goods instead of mostly save them.

[1] http://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm

[2] Country report Italy 2016, European Commission.

[3] Milton Friedman failed to consider the possibility that people undertake adaptive strategies to get on and stay on the dole whenever possible. Source: https://mises.org/library/friedmans-mistake

[4] https://web.stanford.edu/group/recessiontrends/cgi-bin/web/sites/all/themes/barron/pdf/Consumption_fact_sheet.pdf

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Author: studentnovasbe

Master student in Nova Sbe

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