Italy

«The Economist», 11 giugno 1938, pp. 601-2

FINANCIAL DEFICITS. – Turin, May 22. – The Finance Minister’s Budget Speech and the report of the Governor of the Bank of Italy enable us to form a fairly complete picture of the financial and monetary situation. The expenditure on Abyssinia and exceptional defence requirements amounted to 975 million lire in 1934-35, 11,136 million lire in 1935-36, 17,519 million lire in 1936-37, and 9,000 million lire (estimated) in 1937-38. The deficits on the State Budgets in this period did not tally exactly with these figures. Sometimes the ordinary Budgets showed surpluses, sometimes deficits: in 1936-37, for instance, the total deficit was 16,230 millions, and in 1937-38 the total deficit was estimated at 12,000 millions. The total sum for which extra-revenue means were required during the three fiscal years from July 1, 1934, to June 30, 1937, and the first nine months of the current fiscal year, 1937-38, may be estimated at about 36,000 million lire.

The chief disclosed ways and means whereby these deficits were covered were as follows. Some 5,885.8 million lire of 3 1/2 per cent, redeemable stock was converted into 5 per cent, consols. This did not increase the public debt, since the nominal capital was not increased. New 5 per cent, consols to the value of 950.1 million lire were issued. A compulsory 5 per cent, redeemable loan brought in, up to March 31, 1938, some 7,004 million lire. Whether this sum ought to be included in the public debt is an open question. For a portion, amounting to 1,301 million lire, no securities were issued, taxpayers preferring to pay cash and free themselves from the obligation of subscribing to the loan. For the rest, subscribers are nominally State creditors; but, since they also pay an annual tax equivalent to interest and redemption on the loan, the transaction does not involve any additional burden on the Exchequer.

Ordinary one-year 5 per cent. Treasury bills, amounting to 8,937 million lire, have also been issued; and, between July 1, 1934, and March 31, 1938, advances from the Cassa Depositi e Prestiti increased by 6,507 million lire. These five items amount to about 29,300 million lire. The balance of some 7,000 millions was obtained from the sale of foreign securities compulsorily handed over to the Treasury; and by the issue of special 4 per cent. Treasury bonds and 10-lire State notes.

In addition to these measures to cover the deficits the market was called upon to satisfy other public demands for capital. According to the Finance Minister’s estimate, some 6,700 million lire were required for land reclamation, electrification of the State railway, land improvement in Libya, hydro-electric development and similar enterprises subsidised, encouraged or guaranteed by the State. The Istituto per la Ricostruzione Industriale, which is now a permanent financial agency of the State, and the owner of several of the most important industrial concerns of the country, made, in 1937 and 1938, two bond issues of 900 millions each for the equipment of the Iri-Mare and Iri-Ferro. And this large public demand for new capital is wholly additional to the usual demand from private businesses and agriculture. Banks catering for short-term deposits increased their discounts and advances between August 31, 1936, and June 30, 1937, by 2,100 million lire to a total of 29,800 million lire.

NO INFLATION. – Savings were sufficient to meet all these requirements, which amounted, during the three years and nine months between June 1, 1934, and March 31, 1938, to about 50,000 million lire. No recourse to inflation was needed. The note circulation was 16,296.5 million lire on December 31, 1935, 16,525.1 millions on December 31, 1936, 17,468.1 millions on December 31, 1937, and 16,279.7 millions on April 30, 1938.

Two items in the balance sheet of the Bank of Italy bear, however, witness of the pressure of public and semi-public requirements:

Advances made to subscribers to the compulsory 5 per cent, loans were the most important cause of these changes. By the end of 1937, the Bank of Italy had advanced for that purpose 255 million lire to banks, 869 millions to the insurance institutions and companies and 428 millions directly to taxpayers. Moreover, banks and clients had asked for special advances of 2,027 millions (included in the 4,508 millions above), with 5 per cent, consols as collateral, and these were also due to the need for subscribing to the compulsory loan.

Certain general conclusions can be stated. The revenue of the four years, 1934-35 to 1937-38, can be estimated at 90,000 million lire. If we add to this figure, to cover deficit expenditure and semi-public subsidies or guarantees, a further sum of 49,000 million lire, we get a total of all expenditure (direct and indirect, current and capital) of 139,000 million lire. This works out at an annual average for the four years of just on 35,000 million lire, increasing, say, from 21,000 millions in 1934-35 to 40,000 millions in 1937-38.

Of present lire 40,000 millions are equivalent to about 24,000 millions of 1927 lire and about 6,400 millions of pre-war lire. This is more than the Italian taxpayer can bear; but Italian finance is probably moving towards an average ordinary Budget of 30,000 million lire. To reach this lower level will not be easy. But, meanwhile, savings should be sufficient to meet the further deficits which will be temporarily incurred.

The country’s financial structure is becoming increasingly stabilised. There is, however, one precarious point in the structure. Of the assets of Bank of Italy, amounting to 13,500 million lire, made up of discounts and advances, State securities, ordinary advances to the Treasury and advances to the Istituto per la Ricostruzione Industriale (which is State owned), some 80 per cent, is tied up, directly or indirectly, with the State or State agencies. How liquid are these assets? Great care is surely needed, on the part of the Finance Minister and the Government of the Bank, to avert the danger that they may become frozen.