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A post-Covid-scenario analysis of Italy's public debt ratio dynamics
di Cecilia Gabbriellini, Gianluigi Nocella, Flavio Padrini

This paper illustrates possible scenarios for Italy’s post-Covid public debt as a ratio of GDP using the main tool by Italy’s Parliamentary Budget Office (PBO) to assess public debt dynamics in the short-to-medium term, i.e. the deterministic DSA framework. The results of the illustrative scenarios show that in the 2022-25 period, using the PBO macroeconomic projections employed to endorse the government’s forecast in the 2022 Stability Programme, the debt ratio should continue to decrease after the fall recorded in 2021. In the period after 2025, with a neutral fiscal stance and assuming that interest rates gradually return to higher historical levels, projections of the debt ratio depend crucially on the assumptions of post-pandemic trend GDP. If it is assumed that GDP returns to pre-pandemic or higher trend levels, the decline of the debt ratio should continue in the medium term. Conversely, if it is assumed that the pandemic has inflicted a permanent negative “shift” on trend levels, the debt ratio would stabilise at high levels. If it is assumed that, in addition, the trend GDP growth rate converges to the lower Consensus medium-term forecast, rising public debt dynamics cannot be excluded. As a result, a neutral fiscal stance from 2025 would not suffice to ensure declining debt dynamics in more conservative but still realistic scenarios. On the other hand, a significant structural fiscal consolidation from 2025 (half a percentage point each year) could ensure a declining debt ratio in all scenarios except that with lower trend levels and growth. Thus, effective use of the NGEU funds contributing to both a strong recovery and higher trend growth in the medium term than the current Consensus projections would be key to guaranteeing a declining path for the public debt ratio.

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A post-Covid-scenario analysis of Italy’s public debt ratio dynamics

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