February 13, 2018 / 4:21 PM / 7 days ago

Italy election promises based on shaky economic assumptions: economist

MILAN (Reuters) - The economic promises from all Italy’s main parties rely on overly optimistic assumptions about inflation and interest rates, a former government spending adviser who is being courted by various parties said on Tuesday.

Carlo Cottarelli, a former IMF executive director who helped former prime ministers Enrico Letta and Matteo Renzi identify potential public spending cuts in 2013 and 2014, welcomed the fact that all parties acknowledged that public debt must be cut.

“Unfortunately all their programs are based on very optimistic assumptions and some of their proposals lack funding,” he told Reuters in an interview.

The scenario of rising inflation and low interest rates, which all main parties are betting on, could not last long as the European Central Bank will eventually raise rates, Cottarelli said.

All the main parties, especially the center-right coalition leading the polls, are promising tax cuts and higher spending.

But Italy’s public debt pile of more than 1.3 times output limits policy options and spending laxity could scare investors.

Cottarelli, who works for Milan’s Cattolica university, said center-right leader Silvio Berlusconi and other parties had offered him a job in government after the March 4 vote.

The economist said he has not committed to any party so far but will wait until a clear policy will be outlined by the new government after the election.

His presence in government could help reassure markets and EU authorities about the budget plans of any new government. Cottarelli said he would make a decision after the vote.

The center-right wants to introduce a single income tax rate of 23 percent financed through 50 billion euros in cuts to tax breaks.

Cottarelli calculated a flat-tax regime with a “no tax area” for yearly income below 12,000 euros would cost 64 billion euros a year. He said it would be politically difficult to massively reduce tax breaks that amounted to 101 billion euros a year in 2015.

“It would make the tax system simpler and more efficient, but it would not lower the overall tax burden,” he said of the proposal.

The center-right also aims to reduce the debt-to-GDP ratio by 25 percentage points by 2022 by doubling Italy’s primary surplus to 4 percent.

“A 4 percent surplus is consistent with EU requirements, but ... it does not take into account other spending commitments included in their program,” Cottarelli said.

Italy’s ruling PD party proposes to keep the primary budget surplus - which excludes interest payments - unchanged at 2 percent for 10 years.

“I’ve hardly ever seen a country that has substantially reduced its debt with just a 2 percent primary surplus” Cottarelli said.

Cottarelli said he was still calculating how strong Italy’s growth would have to be for the anti-establishment 5-Star Movement to achieve its twin goals of cutting the debt-to-GDP ratio by 40 percentage points in 10 years while also running a deficit.

Editing by Robin Pomeroy

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