The latest report of Italy’s leading investment bank, Mediobanca, presents a thorough analysis of the country’s recent economic developments. While expressing optimism about the potential employment benefits from the labour market reform undertaken by the government under the Jobs Act, the report notes that the domestic output growth gains that have recently been observed in the country are far from what is necessary for it to tackle unemployment at 11.8% and to recover the 10% of output lost between 2008 and 2014. According to government forecasts, Italy’s GDP growth is expected to be 0.9% in 2015 and to further accelerate to 1.3%-1.5% between 2016 and 2019; while marking a positive development, these rates can hardly qualify as a recovery, particularly with respect to the labour market.
The Mediobanca report goes on recommending that the supply-side reforms implemented by the government be complemented by demand-side policies. The report then makes the case for undertaking a fiscal stimulus program along the lines we have proposed and publicly debated on several occasions. The proposal, which is specifically designed for economies with constrained fiscal space and no independent monetary policy (typically the Eurozone Crisis countries), consists of boosting aggregate demand through the issuance of special government bonds called Tax Credit Certificates so as to increase real and nominal output and employment, and significantly reduce the public debt in relation to GDP. The proposal combines the idea of using fiscal policy as a cure to liquidity trap diseases with that of dropping helicopter money to inject new purchasing power into the economy. As other policy options are unavailable, our proposal is the only one that can deal with a crisis that, as Baldwin and Giavazzi (2015) put it, is still a long way from finished.
Fiscal stimulus through Tax Credit Certificates
Tax Credit Certificates (TCCs) entitle holders to receive at redemption rebates on taxes and all other financial obligations payable to the public sector, in amounts equivalent to their face value. For reasons explained below, holders may exercise their right after two years from TCC issuance.
Much as helicopter money is evocatively distributed across the economy for free, TCCs as helicopter bonds are assigned free of charge by the government to households and enterprises. Like government bonds, TCCs trade in the financial market. Their discount is close to that on a two-year zero-coupon government bond. TCC sellers are households and enterprises that need immediate liquidity; buyers are households, enterprises and any other entities that want to use them to save on taxes. Financial intermediaries buy TCCs at a discount from those who want to sell them, and either use them for future fiscal rebates or sell them at a lower discount and make a profit.
TCCs are assigned to households in inverse proportion to their income, both for social equity purposes and to incentivise consumption. TCC allocations to enterprises are proportional to their labour costs, and act as labour-cost cutting devices, immediately improving their competitiveness, as any internal or external devaluation would do. Greater export and import substitution following price reductions not only create more output and employment, they also offset the impact of increased demand on the external trade balance. Smaller amounts of TCCs can also be issued and used by the government to pay for public infrastructure initiatives and social welfare programs.
In a depressed economy, with a high fiscal multiplier, the spending stimulated by TCC issuances increases output and employment. The two-year deferral provision for TCC redemptions allows the multiplier to deploy its effect and generate enough tax revenue to compensate for the fiscal rebates, thus keeping the deficit-to-GDP ratio from growing.
By issuing TCCs, the government grants to the private sector immediate spending power, while facing deferred revenue shortfalls that would be recovered during in the interim prior to redemptions through the new revenues generated by the output growth. As discussed below, special safeguard measures would be activated in the event of fiscal underperformance.
TCCs are hybrid bonds…
TCCs are not debt instruments – the issuing government makes no commitment to repaying them in euros, it only promises to accept redeemable TCCs in exchange for fiscal rebates. Also, there is no possibility, either theoretical or practical, that the issuing state might be forced to default on TCCs.
TCCs are not legal tender, either. The only legal tender of the Eurozone member states remains the euro. No private or public entity (other than the issuing government) is obliged to accept payments in TCCs, although they can (and most likely will) do so on a voluntary basis. Bank deposits continue to be denominated in euros, and public and private budgets and balance sheets continue to be drawn up in euros.
...yet they are a store of value and a potential means of payment
While they are not legal tender, TCCs bear two features that are typically associated with money. They are a store of value, since the right to future fiscal rebates attached to them is a source of value. And they are a potential means of payment since, apart from legal obligations, it is likely that TCCs will circulate and be accepted for payment in exchange of goods and services, provided that the payment infrastructure allows for their circulation as electronic (dematerialised) securities.
Qualifying its conclusions as conservative, Mediobanca estimates that, with the injection of TCCs, GDP growth would reach 3% already in 2016. Mediobanca assumes that in 2016 the government would issue TCCs for €20 billion and would then issue an additional €40 billion each year from 2017. As TCC have a two-year maturity, the total stock of TCCs outstanding will then attain €80 billion by 2018 and stay unchanged thereafter. The overall tax burden will then be permanently reduced. Mediobanca assumes also that TCC-driven spending would trigger a fiscal multiplier of 1.2, which would add €77 billion to GDP in 2017 and generate new fiscal revenues enough to cover the budgetary shortfall due to TCC redemptions. In particular, the budget would record a 0.8% surplus in 2017 (against the 1.1% deficit currently forecasted). Also, with output growth and inflation reaching 2% as a result of the demand shock, public debt would set at 112% of GDP in 2019 (against the 120% most recent government forecast). Finally, the external trade balance would stay positive (above 2% of GDP), even though at a lower level than under the base hypothesis. See Table 1 for a summary of key macroeconomic projections by Mediobanca (in billion euros).
Fiscal stability: Sustainability of the TCC programme
For all Eurozone countries that, like Italy, need to stimulate demand and recover external competitiveness, a TCC programme would in all likelihood be sustainable. Simulations show that a fiscal multiplier slightly less than one would raise domestic output and employment over the two-year deferral, and allow the deficit-to-GDP ratio not to increase. A fortiori, with a fiscal multiplier larger than one (as econometric evidence generally indicates to be the case in highly depressed economies), the program would fully fund itself and generate additional fiscal resources.
However, if a government that is implementing a TCC programme has difficulty reaching its fiscal targets, due to, say, a less than favourable response of the economy, it can take a number of actions to recover fiscal stability, which still benefit from the special features of the TCC bonds. Specifically, the government may introduce a number of safeguard clauses into the program, which would be triggered in the event that output growth were to generate less tax revenues than expected. It may:
- Announce its commitment to finance a (presumably small) share of its expenses in TCCs;
- Compensate taxpayers for tax raises by assigning them new TCCs (thus replacing tax increases with TCCs-for-euro swaps);
- Incentivise TCCs holders to delay TCC redemptions by increasing the value of their TCC holdings (equivalent to paying interest in the form of new TCCs); and,
- Raise euro funds from the capital market by placing TCCs with longer maturities instead of issuing debt.
The effect of these clauses would be way far less pro-cyclical than cutting public expenditure and/or raising taxes, as under EU rules, since they would not drain purchasing power from the economy and would only replace TCCs for euro in investor portfolios.
By combining the introduction of TCCs with the above safeguards, each Eurozone country would be able to trigger a powerful recovery while fulfilling the Fiscal Compact and the OMT programme announced by the ECB in 2012, whereby a country’s public debt is guaranteed by the ECB as long it commits to balancing the budget and to gradually reducing the public debt-to-GDP ratio (to 60%). Currently, crisis countries lack the instrument to perform countercyclical macroeconomic policies. The TCC programme would provide that instrument, while avoiding the ECB need to guarantee increasing volumes of public debts – as TCCs are not to be reimbursed, issuing countries cannot be forced to default on them, which makes the ECB guarantee unnecessary.
Financial stability: Strengthening the banking systems
The introduction of TCCs would also create conditions for reducing and gradually eliminating another serious problem inherent in the Eurozone. Financial institutions, in particular the national banking systems, hold large amounts of government bonds issued by their government. As a result, state insolvency causes severe disruptions to them. As TCCs start being issued, banks can partially replace traditional government bonds with TCCs in their asset portfolio, thus lowering the risk that public debt default hits the domestic banking system.
In addition, the rapid recovery made possible by the TCC programme would help banking systems affected by high levels of non-performing loans gradually to improve the quality of their loan portfolios, as debtors’ repayment capacity and credit risk prospects would both improve.
TCCs: An overdue solution to the Eurozone Crisis
In Italy, even more than in other Eurozone countries, a debate is currently underway, and growing more passionate by the day, about whether the current Eurozone economic governance is sustainable. The main opposition parties, credited in the aggregate with an electoral consensus in the neighbourhood of 50%, explicitly call for Italy to exit the euro.
Under the current framework, Italy (as well as a large part of the Eurozone) is likely to experience many more years of depression, increased social unrest, and potential political instability. No economic governance system can survive if its foundations prove shaky and nothing is done to strengthen them.
As proponents of the TCCs, we devised them as a tool to avoid the breakup of the Eurosystem and its potentially disruptive consequences (including political ones), while putting an end to the deep and long-lasting depression still affecting most of the Eurozone. Nothing less than that could be deemed to be an acceptable solution to the Eurozone Crisis. A euro breakup, in particular, remains a concrete possibility as long as the current dysfunctionalities of the Eurozone continue to go unresolved.
Bossone, B, M Cattaneo, E Grazzini and S Sylos Labini (2015) “Fiscal Debit Cards and Tax Credit Certificates: The best way to boost economic recovery in Italy (and other Euro Crisis Countries),” EconoMonitor, 8 September.
Baldwin, R and F Giavazzi (2015) “The Eurozone crisis: A consensus view of the causes and a few possible solutions”, VoxEu.org, 7 September.
 Mediobanca Securities, Country Update, Italy – Tide turns as recovery starts, 17 November 2015.
 See “Nota di aggiornamento del Documento di Economia e Finanza,” Ministero dell’Economia e delle Finanze.
 For a concise description of the proposal, see Bossone et al (2015). Originated by M. Cattaneo, the proposal was elaborated by the same authors in a public manifesto, available in English translation here. The proposal is also the subject of the recent e-book Per una moneta fiscale gratuita. Come uscire dall’austerità senza spaccare l’euro, edited by the same authors. The e-book collects a number of in-depth studies of the various (economic, legal, accounting, and institutional) aspects of the proposal.
 In 2002, in a now famous speech before the National Economists Club in Washington, former US Fed chairman Ben Bernanke, speaking about stagnation in Japan, recommended that “A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. ... A money-financed tax cut is essentially equivalent to Milton Friedman's famous ‘helicopter drop’ of money”. In fact, Friedman was not the only economist who thought about pouring money from helicopters out to people in the streets as the most effective stimulant to a depressed economy. Keynes himself had written as much provocatively on the subject, suggesting that in the absence of other measures it would be socially useful for the public authority to bury bottles filled with banknotes and let individuals unearth them, thus increasing incomes and jobs via the multiplier effect. Similar forms of monetary cum fiscal stimulus – which helicopter money is all about – were thereafter recommended by as diverse and well-known economists as Henry Simon, Irving Fisher and Abba Lerner.