Italy Spending 20% of GDP on Cash Welfare, Growth Rate at 0%, Unemployment Twice OECD Average
Fiscal Deterioration from Cash Welfare Weakens Growth Momentum, Holding Back Italy
"South Korea Entered $30,000 Income Club in 2018, Must Avoid Repeating Italy's 15-Year Stagnation," Experts Warn
[Asia Economy Reporter Changhwan Lee] It has been pointed out that South Korea, which has surpassed a per capita Gross National Income (GNI) of $30,000, should refrain from cash welfare spending to advance to the next stage. This is a warning not to repeat the case of Italy, which has remained in the $30,000 income range for 15 years.
The Federation of Korean Industries (FKI) released a report on the 24th titled "Implications of Italy's Cash Welfare Policy," warning that South Korea should not follow Italy's example, which succeeded in entering the $30,000 club 15 years ago in 2005 but still has not entered the $40,000 club.
Italy, which has a population and economic scale similar to South Korea, has experienced negative growth rates of -5.3%, -3%, and -1.8% in 2009, 2012, and 2013 respectively since the 2008 financial crisis, maintaining a growth rate of around 0-1%. Despite this persistent low growth trend, the Italian government has expanded welfare spending since the financial crisis.
Social welfare spending, which accounted for 25.1% of Italy's Gross Domestic Product (GDP) in 2008, increased to 28.1% in 2017. In contrast, government spending on economic and industrial promotion such as infrastructure investment and support for industries and enterprises decreased from 4% in 2008 to 3.6% in 2017.
Italy's proportion of cash welfare spending relative to GDP has consistently increased, exceeding the average of the Organisation for Economic Co-operation and Development (OECD). Italy is the OECD country with the highest proportion of cash welfare spending, with 20.2% of GDP paid out in cash to citizens as of 2015.
Most of Italy's social welfare spending is used for pensions. The problem is that as Italy enters a super-aged society with an increasing number of pension recipients, the government has recently expanded cash welfare policies, which have a low economic inducement effect.
The Italian government announced in 2018 that it would review raising the 2019 fiscal deficit target from 0.8% to 2.4% to implement expansionary fiscal policy, causing conflict with the European Union, which demands fiscal austerity. (The final adjustment was 2.04%) Meanwhile, the newly formed coalition government launched last September also decided to maintain the expansionary fiscal stance this year.
Due to the government's expansion of welfare spending, Italy's fiscal soundness has deteriorated, ranking second among European countries in national debt ratio after Greece. Italy's national debt relative to GDP surged from 106.1% in 2008 to 134.8% in 2018, resulting in an annual interest payment of about 84 trillion won.
The European Union (EU) Commission forecasted a worsening government debt increase and downgraded Italy's potential growth rate for this year from 0.7% to 0.4%, the lowest in Europe.
◆ Unemployment rate at 10.6%, double the OECD average (5.3%), rising inequality index, and worsening economic structure = Despite the government's fiscal expansion, Italy's economic structure has deteriorated further.
Italy's Gini coefficient (income inequality indicator) rose from 0.317 in 2008 to 0.328 in 2016. The unemployment rate was 6.7% in 2008, similar to the OECD average of 5.9%, but soared to 10.6% in 2018, twice the OECD average of 5.3%.
Additionally, the youth unemployment rate was the fourth highest in the OECD at 32.2% in 2018, and the birth rate decreased from 1.42 in 2008 to 1.32 in 2017. Italy's per capita GNI has continuously declined from $37,910 in 2008 and currently remains in the low $30,000 range.
The Italian government has not been indifferent to improving welfare spending. Pension reforms and fiscal austerity measures were intermittently pursued in 1992, 1995, 1997, 2004, and 2007, but were not properly implemented due to massive public opposition. The FKI analyzed that it was difficult to persuade citizens accustomed to cash welfare to accept benefit reductions.
The FKI argued that South Korea's current situation resembles Italy's low-growth and aging pattern, and that sustainable growth drivers are needed rather than welfare expansion.
Um Chiseong, Director of International Cooperation at the FKI, stated, "Although South Korea's fiscal soundness is not yet as severe as Italy's, the government’s repeated cash welfare policies amid low growth, aging, low birth rates, and high youth unemployment, which increase pension fiscal burdens, show similarities to Italy."
Director Um emphasized, "Cash welfare is easy to expand but very difficult to reduce later. With forecasts that South Korea's per capita GNI will decline compared to 2018 and concerns about economic recession due to the novel coronavirus, to avoid repeating Italy's case, sound fiscal management and improving the business environment to secure sustainable growth drivers must come first."
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