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Democracy, Debt and Growth
XIX Pontignano Conference
Rome, September 24th 2011
Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 1
Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsr...
Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 2
Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsr...
Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 3
Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsr...
Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 4
Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsr...
Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 5
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Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 6
Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsr...
Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 7
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Pontignano 2011_DemocracyPublic debt and private growth

  1. 1. Democracy, Debt and Growth XIX Pontignano Conference Rome, September 24th 2011
  2. 2. 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
  3. 3. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 2 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. Agenda Debt and growth UK and Italy: two policy mixes Discussion starters
  4. 4. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 3 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  5. 5. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 4 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  6. 6. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 5 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  7. 7. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 6 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. "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"
  8. 8. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 7 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. Agenda Debt and growth UK and Italy: two policy mixes Discussion starters
  9. 9. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 8 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  10. 10. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 9 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  11. 11. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 10 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  12. 12. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 11 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  13. 13. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 12 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  14. 14. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 13 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  15. 15. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 14 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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
  16. 16. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 15 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. Agenda Debt and growth UK and Italy: two policy mixes Discussion starters
  17. 17. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 16 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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 ?
  18. 18. Pontignano 2011_DemocracyPublic debt and private growth_v09.pptx 17 Copyright©2011byTheBostonConsultingGroup,Inc.Allrightsreserved. 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 4. Political system cost reduction: 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 6. Political system cost reduction: 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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