Italy’s Conte Wants to Stretch Budget More to Help Economy
Giuseppe Conte, Italy’s prime minister. (Photographer: Giulio Napolitano/Bloomberg)

Italy’s Conte Wants to Stretch Budget More to Help Economy

(Bloomberg) -- Italian Prime Minister Giuseppe Conte will likely seek parliament’s approval for about 10 billion euros ($11 billion) in extra spending soon, government officials said, in the latest step to revive one of Europe’s most vulnerable economies.

The extra money will widen the budget deficit this year to 11% of gross domestic product from the current estimate of 10.4%, one official said.

Italy’s Conte Wants to Stretch Budget More to Help Economy

The funds will help finance the government’s furlough program, a guarantee fund for small and medium-sized companies, resources for towns and regions as well as European Union initiatives, the officials said, speaking on condition of anonymity.

Already saddled with one of the world’s highest debt burdens, Italy is under pressure to increase spending to help the economy recover from lockdown. While activity has started rebounding since the government relaxed the curbs, the concern is that the coming months will bring more pain when aid measures including a ban on firing staff and the suspension of tax and loan payments expire.

Italy’s Conte Wants to Stretch Budget More to Help Economy

Officials said the budget shortfall is expected to rise by more than 60 billion euros in total in 2020-2021 if Conte’s government decides to to make full use of EU support programs. The government has already approved two stimulus packages worth a total 75 billion euros.

Any delay to a decision on a proposed EU recovery fund to help economies recover from the impact of the coronavirus would be a “failure,” Conte told lawmakers on Wednesday.

A Treasury official said the government was committed to earmarking extra resources where needed, cautioning against putting a figure on total financing needs. A spokesman for the finance ministry declined to comment.

The government may also weigh cutting VAT for a few years to boost consumption, Deputy Finance Minister Laura Castelli said in an interview with state broadcaster Rai Radio 1. The measure could be evaluated along with possible income tax cuts and incentives for companies, Castelli said.

Largest Debt

A key priority of Conte’s fragile coalition government is to avoid a spike in unemployment when the furlough program expires by mid-August. While the jobless rate fell in April to the lowest since 2007, the drop was due to hundreds of thousands of people giving up on the search for work.

The premier said Monday that companies can use the furlough program for another four weeks, adding that the goal is to provide support “for as long as it will be necessary.”

The Covid-19 recession is battering an economy that was already shrinking at the end of 2019. The Bank of Italy forecasts a contraction between 9.2% and 13.1% this year, and a more limited rebound in 2021.

That is set to send debt well above 150% of GDP. While the European Central Bank’s massive asset purchase program is keeping a lid on interest rates, economists say Europe’s push for a recovery fund is key to keeping Italy’s borrowing costs from spiraling out of control.

Fear of stigma attached to the use of Europe’s bailout fund is adding to the burden. Instead, the government is choosing to tap bond markets, where it can borrow at about 1.4% for 10 years. It’s also targeting Italian savers with new issuance aimed at retail investors.

On Tuesday Italy announced a new bond sale for specialists due to take place Wednesday.

Italy’s Conte Wants to Stretch Budget More to Help Economy

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