Draghi Officials Plan Italy Spending Push to Drive Recovery

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The government of Italian Prime Minister Mario Draghi is preparing its first full annual budget with a view to keeping up extra spending even with the economy rebounding faster than expected. 

Finance Minister Daniele Franco’s staff are working on a new fiscal law worth about 20 billion euros ($24 billion) to sustain measures supporting families and businesses during the pandemic, according to officials familiar with the matter who declined to be identified discussing confidential plans.   

Draghi and his colleagues want to reinforce Italy’s rebound from its worst economic crisis since World War II while tapping historic low borrowing costs, and to keep a troublesome coalition in check long enough to pursue an ambitious program of pro-growth reforms. 

“The economy is continuing to grow faster than expected,” Draghi said during a press conference in Rome on Thursday. “The true challenge however will be to keep the growth rate considerably higher than what it was before the pandemic. That’s where we’ll see the economy’s ability to become structurally more solid.”

The finance ministry is now seeing some fruits of the all-in approach to aiding expansion that the former European Central Bank president has pursued. Output this year is likely to far exceed the 4.5% they forecast in April, perhaps reaching close to 6%, according to the officials. 

They said the package under discussion will support citizens’ income, early retirement and other measures ineligible for EU recovery fund aid, and will include new incentives for workers, along with the impact of a fiscal reform set to be approved later this year. 

How much expenditure is needed will depend on the economy’s performance, the officials added, not least since new pandemic restrictions can’t yet be ruled out. A spokesperson for the Treasury declined to comment.

The spending envisaged will feature in the government’s annual budget due in coming weeks, the first since Draghi and Franco took office as part of a technical government in February. The plan will also include economic and fiscal forecasts through 2024. 

Pandemic Nadir 

Such measures would amount to another building block in Italy’s long recovery from its nadir as an early European epicenter of the pandemic -- an emergency that engulfed it in a financial crisis until ECB support put an end to bond-market speculation on its solvency. 

That central bank help is still felt by investors. Italy’s 10-year benchmark yield of 0.66% may be 25 basis points above the record low reached six months ago, but it’s still less than a quarter of the level reached in March last year when the coronavirus forced a nationwide lockdown.

While the country’s governments spent over 170 billion euros on fiscal stimulus since the outbreak, driving debt to almost 160% of output, the euro-zone’s third-biggest economy shrank almost 9% last year. Italy’s prospects are looking brighter now however, with vaccination rates increasing, allowing it to avoid lockdowns for now. 

Data this week showed growth accelerated to 2.7% in the second quarter, bolstered by household spending. Investments had recovered to pre-Covid levels. The ministry’s estimate of as much as 6% growth this year may exceed the 5.7% median in a Bloomberg survey of economists.

A further tailwind for the economy in coming months will be EU spending. In August, Italy received its first tranche of Recovery Fund grants and loans worth 24.9 billion euros, money that will finance projects ranging from infrastructure to health, education and energy, initiatives all aimed at boosting growth in the long term. 

Draghi said his government will also push ahead with competition, justice and labor reforms needed to help the economy grow.

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