Italy Government Deficit – GDP Ratio

Government Deficit – Gross Domestic Product Ratio is a very important index, which reflects the solidity of the economy and the finances of a Nation, in particular as it is mentioned in the Stability and Growth Pact that exists in the European Union. In this case, the GDP represents a parameter (and index) of the state's ability to heal its public debt by, for example, tax impositions and related tax revenues. A Country therefore in general could have a high Public Debt but also a high GDP (as in the case of the United States) without necessarily running into a situation of financial danger, i.e. the risk of insolvency; the relationship, and the reciprocal development, of the two quantities is therefore important.

It should be emphasized that the Maastricht parameters that refer to Public Debt do not include implicit Public Debt, i.e. the promise of future spending for the welfare state of Member States, or of the social spending, i.e. the promises concerning assistance, health, the rules for retirement and the requirements of this latter.

The ratio of Government Deficit / Gross Domestic Product (Rapporto Debito_Pubblico / PIL in Italian language) presents four possible situations in which the Country may be:

• GDP growth rate < Government bond interest rate, with primary deficit in relation to GDP i.e: the Country expenditure exceeds the revenue, in relationship to GDP. In this first case, therefore, the Government Deficit / GDP ratio tends to diverge, that is, to increase infinitely, thus showing a risk of insolvency in the medium and long term.
• GDP growth rate (n) > Government bond interest rate (i), however a primary deficit in relationship to GDP is still present. In this second case the Government Deficit / GDP ratio decreasingly converges towards a certain value, which is called "steady state" ("stato stazionario in Italian language), if and only if, the ratio between Government_Deficit / Initial GDP is greater than the "steady state". In this case in particular, in order to have a Government Deficit / GDP ratio that decreases, it is necessary for GDP to grow to the point of making the difference (n) - (i) sufficiently large, and also that the primary deficit must be as small as possible. Thus, if the initial Government Deficit / GDP ratio is lower than the steady state, the Government Deficit / GDP ratio converges towards the stationary state always, and increasingly.
• GDP growth rate (n) < Government bond interest rate (i), however there is no primary deficit, that is, revenue is higher than expenditure. In this third case, the Government Deficit / GDP ratio decreases and vanishes after a certain period of time if, and only if, the ratio between Government Deficit and initial GDP is lower than the steady state. In this case in particular, in order to have a declining Government Deficit / GDP ratio, it is necessary that the difference of (n) - (i) is sufficiently small, and moreover that the revenues are sufficiently large. However, if the initial Government Deficit / GDP ratio is higher than the steady state, the Public Debt / GDP ratio tends to increase infinitely with a consequent increase in insolvency risk.
• GDP growth rate > Government bond interest rate, and there is a primary surplus where the revenues are higher than the expenditures. In this case the relationship Government Deficit / GDP decreases rapidly to become null, eliminating the risk of insolvency.

High governmental deficit is considered harmful for the national economy. Thus lower values are better for the euro quotes.