Italy raises budget deficit forecast as economic pressure increases

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Italy’s government has set this year’s budget deficit at 5.3% of economic output, above its previous target, as rising costs from a controversial “super bonus” tax break strain the country’s finances. The rate was raised from 4.5%.

Prime Minister Giorgia Meloni’s government also predicted on Wednesday that next year’s budget deficit would widen to 4.3% of gross domestic product (GDP) from the 3.7% target set in April.

Finance Minister Giancarlo Giorgetti says Rome will support low-income households, encourage families to have more children and raise public sector wages amid economic slowdown by raising next year’s budget deficit target. He said that it would be possible to fund measures for this purpose.

But such expansionary spending could lead to tensions with Brussels, as it would push Italy further away from EU rules that limit budget deficits to 3% of gross domestic product.

The rules were suspended during the coronavirus pandemic to give countries fiscal space to respond to shocks, but are set to come back into effect next year. Some other countries have already announced spending cuts to reach that goal.

The Italian government expects the budget deficit to be below 3% by 2026.

But Giorgetti said he believed European Commission officials, who must approve Italy’s budget due next month, would be sympathetic to pressure on Rome. Other EU member states, including France, are also targeting larger budget deficits next year than are technically allowed.

“Certainly they will understand the situation, and so will many of their colleagues, European finance ministers who are dealing with an economic slowdown or, in some cases, a recession.” “This approach is responsible and prudent.”

Italy’s 10-year bond yield rose 2 basis points to 4.8% on Thursday morning, close to an 11-year high. The spread over the German equivalent rose slightly to 195 basis points after the German 10-year bond yield rose 1.3 basis points on Thursday.

Italy’s government also cut its economic growth forecast for this year and next, reflecting broader distress in other euro zone countries and higher borrowing costs as the European Central Bank hikes interest rates.

Italy’s gross domestic product (GDP) is now expected to grow by 0.8% this year, up from 1% previously. The government has lowered its GDP growth forecast for 2024 from 1.5% to 1.2%.

In preparation for drafting the 2024 budget, Meloni’s three-party right-wing coalition is making a tough balancing act to reassure global markets that it is maintaining fiscal discipline while starting to deliver on its campaign promise to cut taxes. confronting.

Giorgetti lamented that the ECB’s latest interest rate hike would cost Italy an additional 15 billion euros in interest costs, with a public debt-to-GDP ratio of over 142%.

But seriously complicating matters for Meloni’s government is the increase in spending on the super bonus scheme launched by the previous coalition government led by the populist Five Star Movement.

The scheme, which offers Italians a 110 per cent tax credit for home renovations to improve energy efficiency and upgrade the building’s exterior, has sparked a nationwide home renovation boom and has helped with the coronavirus pandemic. It facilitated a rapid economic recovery from the virus shock.

However, the program comes at a rising cost to the Treasury, which Meloni estimates at around 140 billion euros in total. He has been a fierce critic of super bonuses and has moved to restrict the system since taking office last year.

“The numbers speak for themselves,” Meloni told state television last week. “A €140 billion hole taken from the health system, education and pensions to renovate villas and even castles.”

Giorgetti told a business audience this month that the plan leaves little room for the government to maneuver. “I get sick to my stomach thinking about the super bonus,” he said.

Additional reporting by Martin Arnold in Frankfurt