Privatization versus defence of public services

Jason Nardi, Tommaso Rondinella, Elisabetta Segre

Despite the common conception that public expenditure is excessive, Italy actually ranks last among European countries in almost all areas of social protection spending. The one exception is the public pension system, which is now the target of a drive towards privatization. Attempts to privatize the provision of public services, however, have been tempered through the efforts of civil society.

Current socialexpenditure trends

In Italy it is quite commonly believed that public expenditure is excessive, notonly in absolute terms, but also in relation to other industrialized countries.In fact, however, European countries spend on average more than what is spent inItaly. This is not true only in the case of pension-related expenditure, whereasfor social assistance and social security, Italy ranks among the last positionsof European countries. One of the most critical aspects lies in the fact that asan ageing country, Italians are now increasingly paying more for their elderlywithout a sufficient generational exchange that can produce enough revenue tocover all social security costs.

Social protection expenditure in Italy represents roughly a quarter of GDP.During the last five years it has grown at a relatively high rate, though at aslower pace if compared with previous periods. The average increase in nominalterms between 2001 and 2005 was 4.9%, while it was 5.2% between 1996 and 2000and 6.5% between 1990 and 1995. The ratio between social expenditure and GDP hasgrown by 1.6 percentage points during the last five years, rising from 24.5% in2001 to 26.1% in 2005 (
Pizzuti, 2007).[1] Most of the increase,however, is due to a slowing down of GDP growth. In 2005, for example, ItalianGDP increased by 0.1%, while in order to maintain the same services, publicexpenditures had to grow by at least the same amount as the inflation rate, i.e.2.4%.

Most of the increase in social protection expenditures is due to publicinstitutions. Nevertheless, expenditure by private institutions – representingthe activity of non-profit social institutions and the interventions ofcompanies in favour of their employees – grew more in 2005 than publicexpenditure (4.4% vs. 3.5%).

Pension-heavy social expenditure

Considering the breakdown by sectors, there has been a clear decreasein the weight of the social security sector in favour ofthe health sector, while social assistance remained stable during the lastdecade. Nevertheless, social security still covers more than two thirds of totalsocial expenditure, descending from 72.2% in 1995 to 68.5% in 2005. In terms ofGDP, social security absorbs 17.7% of the 26.1% of GDP represented by totalsocial expenditure. Most of this corresponds to pension contributions – 14.6%of GDP – while illness, maternity, unemployment, wage integration and familyallowance benefits all combined total 1.7% of GDP. Healthexpenditure represents 6.4% of Italian GDP, having increasedsignificantly during the last decade from 4.8% in 1995. Its main component ishospital services, which represent 43% of health expenditure and account formost of the increase. Finally, social assistance is the component that changed the least, remainingstable at around 2% of GDP.

Italy and the EU

A comparison with other European countries is possible only for the year 2004.Overall social expenditure in Italy was 1.4 percentage points below the EU-15[2]average (25.2% of GDP vs. 26.6%) and if per capita expenditure at purchasingpower parity for the EU-15 were set at 100, Italian expenditure would reach only86.7.[3]

TABLE 1.Social protection expenditure by function in 2004 as % of GDP


Health care


Old age





Social Exclusion
































Source: Eurostat
*In the case of Italy only active policies are included.

With regards to social expenditures other than pensions, Italy presents very lowlevels, below most European countries. This is the case of health, for whichItaly spends nearly one percentage point of GDP less than the average. But muchworse is the pattern for assistance policies, such as support measures forfamilies and the unemployed, as well as those for housing and social exclusion.For these areas Italy scores at the bottom of the European ranking.

Another indicator of the quality of social expenditure is the share of monetaryand in-kind transfers within total social benefits. While in Ireland, the UK,Sweden and Denmark the in-kind benefits share is around 40%, in Italy it isaround 25%, one of the lowest in Europe, showing a preference for monetarytransfers instead of the provision of services.

Social security cushions

There is an obvious imbalance in the composition of social protectionexpenditure in different areas, particularly for protection against risks otherthan old age. From a detailed analysis of labour policies the social securitycushions system appears as a “non-systematic and nearly ungovernable set oftools characterized by continuous overlapping” (Chair of the Council ofMinisters
, 1997).Inconsistencies are twofold: a sectoral one, since employees of bigger companiesare more protected because of the strength of their union representatives; and adimensional one, depending on whether employment is permanent or temporary andon the fulfilment of contributory requirements in periods previous tounemployment (Pizzuti, 2007).

The insurance nature of unemployment benefit schemes leads to inadequate orabsent coverage of job loss risks for occasional workers or for young people whohave been working for a short time. Moreover, the Italian system is completelylacking in protection measures for ‘atypical workers’, i.e. those workingwithin the contractual frameworks aimed at a higher flexibility of the labourmarket introduced in 2003. Such contracts have been left with no social securitysafety net, resulting in an increase of precariousness together withflexibility.

The overall expenditure for social security cushions totals no more than 1.5% ofGDP, and active unemployment policies represent 0.5% of GDP. The scarcity ofresources for social security in Italy is demonstrated by the amount of benefitsper unemployed person as a percentage of an active person’s income. Italyshows an expenditure slightly higher than new EU member states, but much lowerthan Northern countries. Unemployment benefits as a percentage of income arebelow 10% in Italy, while the EU averages are 18% for the EU-15 and 15% for theEU-25.

The biased ‘proof’ for privatization of social security

One of the most noteworthy developments in the social protection sector is theprivatization of the Italian pension system. The issue is very complex and doesnot only involve welfare considerations.

The need for drastic reform of the public and compulsory pension system due toits financial unsustainability is an issue that began to have major publicresonance at the beginning of the 1990s. There are basically three factors usedas ‘proof’ of this necessity: serious accounting imbalances in the ItalianInstitute of Social Security (INPS), population ageing, and the forthcomingretirement of the so-called ‘babyboom’ generation.[4]All these factors are used to justify the reduction of benefits guaranteed bythe public system and a shift to a private pension system. Italian publicopinion is deeply convinced that some sacrifices need to be made in order topermit the system to survive. What public opinion is not told is that there arestrong biases behind this ‘proof’.

First, one important reason for the INPS accounting imbalance is that it isresponsible for providing other social security benefits that should be paidwith general fiscal revenues. The INPS balance sheet includes expenditures thathave nothing to do with pensions; revenues and expenses related to the pensionsystem are more than balanced. Furthermore, pension expenditure is expressed ingross terms, which means a significant part of this money is going to returnback to the state as tax revenues.

Second, it is not only the ageing population that should be taken into account,but also those who are currently unemployed, especially since the unemploymentrate is not decreasing. Finally, the retirement of the baby boom generation,which comprises approximately 60,000 people, will imply an expenditure peak 20or more years from now, while the reforms introduced are supposed to reach fullapplication in 2010.

Contributory and earning-relatedpensions

Based mainly on the abovementioned considerations, a reform process began in themid-1990s and is still ongoing. The goal is to convert the system from apay-as-you-go system withearnings-related pensions aimed at guaranteeing a replacement rate closeto 80% in many cases, into a funded system with contributory pensions. Basically, this implies abandoning asystem based on the principle of intergenerational solidarity where activeworkers pay for the pensions of the former workers who contributed to theirgrowth, education and the build-up of the infrastructure essential for theirwork. Under the funded/contributory scheme, instead, every worker isself-reliant, saving an amount of money to provide for an adequate pension uponretiring. The reform has reduced the public retirement system for futuregenerations to a social security transfer meant to avoid extreme poverty amongthe elderly population. The replacement rate guaranteed is on average around40%.

Private pension funds

This brings us to the core of the process aimed at inducing people to shift to aprivate retirement scheme based on private pension funds. This intention isalways justified through the idea of the public scheme’s unsustainabilitycombined with the supposed ‘evidence’ that the market is in the long runmore remunerative than the public provision system (essentially based on theaverage GDP growth rate over the last five years).The point that is not made clear is the contradiction of a financial marketgrowing constantly faster than the real economy. This phenomenon represents aredistributive process from the real economy made up of firms, work and wagestowards the owners of financial assets: financial markets do not create wealth,they only redirect it. The outcome of this flow is the reduction of the wageshare in the economy in favour of the capital share.

Pension funds have incredible power in the financial markets: they represent 30%of the financial instruments present on the New York Stock Exchange. Whoever hasaccess to this enormous amount of money has access to enormous economic andpolitical power: it is not by chance that pension funds are managed by afinancial oligopoly composed by Merrill Lynch, Rothschild, Crédit Suisse, ABNAMRO and a few others (in Italy a handful of banks – San Paolo, Unicredit,Generali, Arca, Fineco-Capitalia and Monte dei Paschi – manage 70% of the funds).

In spite of the efforts of past governments to encourage people to shift to aprivate system, pension privatization is still at an early stage, mainly becauseof the complexity involved in the shift from a pay-as-you-go system to a fundedsystem that will probably take generations to be definitivelyimplemented.

Defence of public social services

Another ongoing process isaimed at reducing welfare universalism in favour of a market structurethrough the privatization of the provision of public services such as education,health care, energy distribution, collective transportation and water supply.Although the privatization process has been presented to the public asunavoidable and somehow ‘scientifically tested’ by economists, a greatdebate has arisen between those who believe that the market is the only way toreduce losses caused by the public structure’s lack of incentives, and thosewho highlight the distinct role of public services which cannot simply beconverted to commodities. In fact, even though their production might befeasible (and profitable) for private firms, the nature of these services hashistorically induced the state to guarantee and protect their provision, keepingthe production or process under public democratic control.

Mainly following the European Commission’s directives, the current governmentprepared a law approved by the parliament (the so-called Lanzillotta Bill, namedfor the minister of Regional Affairs) concerning the privatization of localpublic services. The final version of the law was fairly different from thefirst version presented to the parliament. The constant work of many civilsociety campaigns not only prevented the complete realization of thegovernment’s intentions, but also opened the way for a possible future returnto local management of important public services. While within the earlierlegislation the only way to provide those services was through a joint-stockcompany only partially controlled by the municipalities, the forthcoming lawclearly distinguishes between two ways of provision of public services: theprivate one and public one. This might be seen as an important step to overcomethe ambiguity nested in a system that used to consider as public the provisionof services by a stock company which is actually a private institution aimed atcreating economic profitability hardly consistent with the provision of publicservices.

Another significant outcome of the negotiations between government and civilsociety concerns water management. An amendment to another important law aimedat introducing more competition within certain markets (such as taxis, mobiletelecommunications, petrol distribution and pharmacies) made it possible toexclude water from those goods and services managed by private companies. InItaly, water has been at the centre of an increasingly successful struggleagainst privatization. The Forum for Public Water, which brings together about70 campaign groups and trade unions and over 700 municipalities, recentlylaunched a national initiative to halt local water privatization processes andbring back the already privatized regional and local water services to publicmanagement. The campaign was joined by hundreds of NGOs and networks coveringboth the national and the local level (and encompassing more than 500,000citizens) asking for a new law to recognize water as an inalienable public good.


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[1]Itmust be noted that, unlike in other European countries, social expenditure alsoincludes severance payments. The actual value for 2005 should therefore be24.7%.
[2] The 15 EUmember countries before the 2004 enlargement.
[4]In the 1960s, due to improved living conditions, there was an increase in thebirth rate, and the people belonging to this generation are supposed to retirein the mid-2030s.