Daily Management Review

Italy's new draft budget alarms European Commission


The increase in social spending and reduction of the tax burden will lead to an increase in the budget deficit of Italy to 2.4% of GDP in 2019. This figure is included in the new financial plan of the country, proposed by the government. Also, Italy intends to abandon the VAT increase from 2019. The European Commission, which will have to consider the draft budget in October, hurried to warn: the growth of Italy’s public debt, which has already exceeded 131% of GDP, could trigger a new crisis if the situation in the economy worsens.

ell brown via flickr
ell brown via flickr
Next year, deficit of the Italian budget will increase to 2.4% of GDP against the previously planned 0.8% of GDP, follows from the draft budget for three years, proposed by the government. The project was supported by two main parties - the Five Star Movement and the Northern League party. It included additional expenses of € 33.5 billion, of which € 27.2 billion would not be offset by cost reductions. These funds will be mostly spent on campaign promises - raising the minimum level of pensions and benefits for the unemployed and the poor, as well as reducing the tax burden for small companies and citizens with low incomes. The document also tells about abolition of the increase in VAT (from the current 22%), which was to occur next year.

Formally, the new financial plan does not violate requirement of the Stability and Growth Pact, which obliges the EU countries to have a budget deficit of no more than 3% of GDP. However, the country's public debt is 131.8% of GDP (€ 2.3 trillion), the second largest after Greece, and is significantly higher than the threshold set by the same pact at 60% of GDP. European Commissioner for Economics and Financial Affairs Pierre Moscovici noted that the Italian budget "goes beyond the key rules" of the EU to reduce the national debt, warning that a further increase in the burden will complicate servicing of obligations and may destabilize the situation as soon as the economy deteriorates. In the future, this will lead to a reduction in social spending and investment in infrastructure renewal. At the same time, he did not rule out application of sanctions to Italy in case of non-observance of the parameters set by the EU, although he noted that he was not a supporter of such measures. Brussels has not yet given an official assessment of the draft Italian budget, which must be submitted for mandatory approval by October 15.

Ignazio Visco, Head of the Italian Central Bank, also pointed out the need to refrain from debt growth on Friday, stating that private and public investment, as well as a reduction, not an increase in pressure, should remain a priority. Italian Economy Minister Giovanni Tria, not supporting any of the parties in the coalition, had previously insisted on the need to limit the growth of the deficit of 2% of GDP, which would facilitate the achievement of a compromise with the EC.

Concerns over the fiscal stability of the country have already caused a sharp drop in markets (Italian stock index FTSE MIB lost 3.7%) and sales of Italian government securities (the required yield on ten-year bonds rose from 2.9% to 3.2% per day, spread to German bonds - up to 270 points). ING Bank expects that the spread will stabilize at 250-300 points and will not grow if the deficit remains below 3%. Capital Economics believes that the actual size of the deficit may even exceed the forecast figure, but indicate that for now the sale in Italian bonds has not affected the growth of yields on bonds of other countries in the European periphery.

source: reuters.com