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By ROBERT BALL

Everyone knows how bad the U.S. budget deficit is. How it rolls like a tidal wave of red ink over the Administration and Congress, undermining the dollar, pushing up interest rates, shaking the international monetary system and threatening to put future generations of Americans in hock to foreigners forever. How, whenever moneymen gather, finance ministers moan, central bankers chide, and all stare in horrified fascination. How could America get itself into such a mess?

Now imagine a country that regularly runs annual budget deficits five times as bad as those of the U.S.; whose fiscal policy is so paralyzed by political rivalries that its national debt is equal to its gross domestic product (vs. only 50% for the U.S.); whose debt problem is so out of hand that interest payments alone amount to 8% of GDP. Compared with this, the U.S. seems almost a model of fiscal probity.

Such profligacy must bring retribution, one would think. Yet Italy goes serenely on, racking up an enviable economic record and attracting little international criticism or even attention. Perhaps insolvency resides in the eye of the beholder, for there can be no doubt about the numbers. Italian governments have been abusing their credit cards for 20 years, piling debt onto debt. Only once in the past dozen years has the annual budget deficit been less than 10% of GDP. By contrast, the worst U.S. ratio was 3.8% in 1983; last year it was only 1.8%. Moreover, most of Italy's debt is short to medium term, subject to volatile interest rates. A 1% rise in short-term rates costs the government 7 trillion lire ($5.1 billion) annually in extra interest.

The Italian economy, however, ignores the problem. For the past six years, its annual growth rate of 3.5% to 4% has been one of Europe's highest. Inflation has come down smartly from more than 20% in 1980 to 5% last year. The lira has appreciated against most other currencies. To be sure, interest rates are still in double figures, and unemployment is stuck above 10%, but that figure is skewed by a higher jobless rate in the backward south; in the thriving north, it is lower. Overall, Italy's economic performance is sparkling. How do the Italians do it? Is this a real-life film with Marcello Mastroianni as governor of the Bank of Italy?

Even sobersided economists accept that there is something odd about the Italian experience. A recent scholarly study, The Italian Miracle, does smack of the supernatural compared with the German miracle, which was 99% hard work. But there are rational elements. Italians are great savers, squirreling away 15% of income, much of it in government securities. Fully 97% of the national debt is funded domestically, and nearly two-thirds of the negotiable state debt is in the hands of individuals. This mode of saving doubtless owes something to exchange controls and preferential tax treatment, but Italians have been willing buyers of state paper, thus absorbing the burgeoning debt. In this situation, rises in interest rates have the perverse effect of stimulating consumption by putting more money into people's pockets. Moreover, another part of the government's deficit spending directly helps private business by shouldering part of employers' social-security contributions, thus boosting profits and encouraging investment.

Benign as the experience has been so far in this fiscal wonderland, the present Italian government is determined to blow the whistle. Prime Minister Giulio Andreotti has framed a budget strategy that aims at balancing the books by 1993 through a combination of tax increases and spending cuts. Similar targets have been set and missed before, but this time a new sense of urgency comes from the danger that Italians may start sending their savings abroad when capital movements in the European Community are freed next year. Bank of Italy Governor Carlo Ciampi warns that "a change in the handling of public finances is mandatory," because "every delay increases the burden on us and on future generations." That's not Mastroianni talking.