With elections ahead, Italy moves to control a staggering deficit

Italy's minister of the Treasury, Giovanni Goria, would love to have David Stockman's budget-deficit problem. In the United States, the deficit in the current fiscal year will amount to about 5.5 percent of the nation's total output of goods and services. In Italy, the similar ratio for the central government is about 15 percent, the worst among the industrial nations.

That is roughly a deficit of 100 trillion lire, or about $52 billion. It is up from about 95 trillion lire last year. The US deficit this year, according to the latest forecast, will be $213 billion, but related to a much larger economy.

Despite the deficit, the Italian economy continues to grow. ``That's the miracle,'' the minister joked in an interview here last week.

Mr. Goria, who like Mr. Stockman has a responsibility for the spending side of government, maintains that Italy's high savings rate -- more than 22 percent of disposable income -- makes it easier to finance such a massive deficit than in the US.

Moreover, he adds, much of the interest costs on the national debt, equivalent to 60 percent of the deficit, are recycled back into government paper.

Foreign economic experts sound more concerned. One, for example, wondered if the strain of selling so many government bonds to finance the massive deficit would raise Italian interest rates, slow the economy, boost already high unemployment, increase the inflation rate, and thereby open the way for something of a revival of the Communist Party.

Goria has a four-year plan for restraining the growth of government spending. Spending (aside from debt-service payments) should grow no faster than inflation. Public investment should not exceed the growth of national output.

By 1988, the ratio of public debt to national output would be stabilized. The government could face parliamentary elections that year with ``a much improved economy,'' the bearded minister says.

Actually, an election atmosphere has already enveloped Italy. The government faces local elections June 9. Though these local elections do not affect parliamentary power, they are considered something of a popularity contest.

The five parties that make up the coalition government of Bettino Craxi, along with the Communist Party opposition, will be watching carefully. In the meantime, it is politically difficult for the government to curb its expenditures.

``That is where they really have to act,'' commented Kevin Logan, an economist with Citicorp Information Services. Government revenues already amount to some 42 percent of gross domestic product.

``There is a limit to how far they can go in raising taxes,'' Mr. Logan says.

Foreign experts suggest that Italy should shrink the huge deficits of state-owned corporations, restrain the pay of government employees, and hold down spending on health programs and pensions.

Another troublesome area for the government is the scala mobile wage indexation system.

Last year Mr. Craxi, the country's first Socialist prime minister, got his Cabinet to agree to follow a decree limiting the scala mobile in an attempt to slow down inflation.

Observers, considering this a bold move, added the word decisionismo to their vocabulary of Italian political language. Parliament subsequently approved the decree.

Mr. Goria, a member of the Christian Democrats, the largest party in the coalition, complains that indexation means that past inflation propagates current inflation.

To the government's embarrassment, major trade unions organized a successful petition drive last year for a referendum as to whether the law should stand. There have been discussions in the Cabinet on ways to change the law to make the June vote on this issue moot.

The recent assassination by the Red Brigades of Ezio Tarantelli, a University of Rome professor involved in bringing together labor and management on the issue, may stimulate a consensus on changes in the scala mobile, according to one close observer.

But if the referendum does go ahead, polls of the public indicate it would pass and employees would get a wage boost of about $15 a month.

``If last year's reform is voided, this would disrupt economic activity and could undermine the Craxi coalition government,'' suggests Lawrence L. Kreicher, an economist with Irving Trust Company.

Mr. Kreicher wonders whether the progress on inflation might be reversed. Inflation is running at some 8.6 percent, down from double-digit rates. The government's goal is to trim it to 7 percent this year. With wages rising at 10 to 11 percent, that will be difficult.

The renewed strength of the lira in relation to the US dollar will, after a lag, help Italy in its inflation battle. But Goria says he will be happy if the government meets its 7 percent target. And it will be tougher for business to achieve as large cost-saving productivity improvements as last year, he notes.

Goria forecasts 2.5 percent growth in Italy's output this year, down from a handsome 3 percent last year.

Despite Italy's troubles, none of the economic experts interviewed see disaster ahead. Italy has a large underground sector which thrives despite government excesses.

To avoid the regulation of big corporations, businesses on average have been getting smaller in the past decade. Economists believe the Italian economy is highly resilient.

Will the Italian government have the necessary political discipline to keep a helpful restraint on spending?

``Let us hope so,'' Mr. Goria said.