Italy: A higher fiscal deficit would make sense only if it led to an increase in corporate investment

The new Italian government has several times discussed the possibility of increasing Italy’s fiscal deficit to above 3% of GDP to finance its campaign promises: flat tax, universal income, increased generosity of the pension system. A high Italian fiscal deficit financing additional household consumption would, first, have very little impact on growth because of Italy’s supply-side problems and, second, lead to a sharp rise in Italian long-term interest rates. The only acceptable configuration would be an increase in Italy’s fiscal deficit financing tax incentives leading to a rise in corporate investment and an upturn in productivity.