The origins of the public debt of Italy: Geographically dispersed interests?

In this paper we reconstruct the macro regional government deficits of Italy and find that the aggregate deficit resulting from our estimates captures quite well the entire dynamics of the Italian national public deficit. This new data set shows that the ultimate cause of the accumulation of public debt of Italy lies in the extraordinary fiscal imbalance of the Southern regions. The new data allow us to test empirically a simple Common Pool model, augmented by a variable measuring the political influence of each macro region in the Government, to verify the existence of a geographically dispersed interests issue for the Italian case. Our measure of political influence turns out to significantly explain the regions’ deficits also when controlling for population and income gaps. In addition, using a J-test approach, we find that including the predictions of the Common Pool–Pork Barrel regional model into a general model of the Italian national deficit turns out to greatly increase its explanatory power. The results call for deep institutional reforms of the fiscal decentralization so far implemented in Italy.