Luis Garicano has an amazing post on “one of the dumbest fiscal policies in recent memory.” Launched in Italy during COVID by Prime Minister Conte, the “Superbonus” scheme subsidized 110% of housing renovation costs. Now if one were to use outdated, simplistic, Econ 101 type reasoning one would predict that such a scheme would be massively costly not only because people would rush to renovate their homes for free but because the more expensive the renovation on paper the bigger the bonus.

The proponents of the Superbonus, most notably Riccardo Fraccaro, were however, advocates of Monetary Monetary Theory so deficits were considered only an illusory barrier to government spending and resource constraints were far distant concerns. Italy still had to meet EU rules, however, so the deficit spending was concealed with creative accounting:

rather than direct cash grants, the government issued tax credits that could be transferred. A homeowner could claim these credits directly against their taxes, have contractors claim them against invoices, or sell them to banks. These credits became a kind of fiscal currency – a parallel financial instrument that functioned as off-the-books debt (Capone and Stagnaro, 2024). The setup purposefully created the illusion of a free lunch: it hid the cost to the government, as for European accounting purposes the credits would show up only as lost tax revenue rather than new spending.

In MMT terms, Fraccaro and his team effectively created money as a tax credit, putting into practice MMT’s notion that a sovereign issuer’s currency is ultimately a tax IOU​.

So what were the results? The “free renovation” scheme quickly spiraled out of control. Initially projected to cost €35 billion, the program ballooned to around €220 billion—about 12% of Italy’s GDP! Did it drive a surge in energy-efficient renovations? Hardly. Massive fraud ensued as builders and homeowners inflated renovation costs to siphon off government funds. Beyond that, surging demand ran headlong into resource constraints. Econ 101 again: in the short run, marginal cost curves slope upward.

https://marginalrevolution.com/marginalrevolution/2025/02/italys-superbonus-the-dumbest-fiscal-policy-in-recent-memory.html?utm_source=rss&utm_medium=rss&utm_campaign=italys-superbonus-the-dumbest-fiscal-policy-in-recent-memory