In view of the upcoming Italian general election, I've been reading the program of a party (please let me know in the comments whether I can/should mention its name), and in a section of it they propose a freeze of the public spending for the next 5 years in order to face the gigantic public debt. Not having a solid understanding of Economics, I thought of asking about it here.
Here's the translation of the relevant passage:
The Italian government debt, stabilised over the last few years around 132% of GDP, has become an unsustainable weight for the country's economy. Interest expenditure, equal to 66 billion euros (around 8% of the total expenditure), is a huge weight on the national budget that determines a displacement of resources in the economy. Besides, the high stock of debt is a threat to the stability of the whole euro area and one of the major obstacles to the process of integrating budgetary policies at European level.
To face the problem we propose a freeze of the public expenditure in nominal terms for the duration of the next parliamentary term, as well as a redesign of taxation with cuts to the tax rates on income of people and companies, and a reduction of fiscal expenditure: thus there would be a redistribution of resources from the public to the private, from income to productive economy.
To freeze nominal expenditure means to establish an insurmountable limit for five years, which entails a reduction of public spending as a share of GDP if inflation and economic growth are positive. It is therefore necessary to reduce current outlay and tax benefits in order to compensate for the inertial increase of pension costs, by acting on current expenditure on the basis of the guidelines set by the former commissioners for the spending review.
I have seen critics to this strategy: according to Dr Domenico Moro, a lecturer in Economics at Birmingham Business School, debt growth does not depend on public primary expenditure. Indeed he states that in Italy it was below the European average in 2016, whereas the problem is interest expenditure (4% in Italy vs 1.8% in the EMU). He also points at wrong choices made by the Treasury Department over the last few years.
But in fact he adds that reducing public spending wouldn't be only useless, but even counterproductive: in a context of weak recovery and most of the new workers having a temporary contract and being underemployed, it would result in a drop of aggregate demand. This notoriously has a downward effect on GDP growth, and in turn an upward effect on public debt - since it is calculated as a percentage of GDP.
He then concludes the other proposal, i.e. the reduction of the company tax rate accompanied by the VAT increase, would make it worse: prices would rise and workers' income would drop proportionally; this would yield a further decrease of aggregate demand, especially of consumer goods rather than luxury ones, and consequently a decrease of GDP.
Question: is Moro's analysis completely sound? Did he really demolish the economic agenda of this political party?