Italy Prepares to Test EU’s Flexibility With Its 2020 Budget
Italy Prepares to Test EU’s Flexibility With Its 2020 Budget
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As Italy’s government counts on goodwill it’s built up with European partners to allow it to start delivering on promises to voters, the coalition is already paring down its ambitions.
Avoiding a sales tax hike worth 1.3% of the country’s output is the main item in next year’s 30 billion-euro ($33 billion) budget plan, leaving limited scope for social measures like lower taxes for workers or free preschool for underprivileged kids.
Sales tax increases will also be avoided in future budgets through continued improvement of anti-evasion measures, Prime Minister Giuseppe Conte said in an interview with Corriere della Sera published Thursday.
Conte’s administration has promised a moderately expansionary budget that would see the country’s structural deficit -- which strips out one-time measures -- widen slightly in 2020 before narrowing in coming years. That would require ample flexibility from the European Commission, which must sign off on the plan.
According to the draft budget published Wednesday, less than two-thirds of social measures will be funded with resources earmarked from spending cuts or revenue from improved tax collection.
The draft budget approved by Conte’s cabinet sets next year’s deficit target at 2.2% of gross domestic product, which would worsen the country’s structural deficit by 0.1 percentage point. That contrasts with a European Commission rule that requires annual improvement of 0.6%.
“Looking at the structural deficit estimates provided in the budget we believe there is a mild risk of a significant deviation procedure,” said Chiara Zangarelli, an economist at Nomura International Plc. That could be triggered by a deviation greater than 0.5%. Still, she doesn’t see grounds for Italy to face EU disciplinary action.
The country’s previous government -- also led by Conte but supported by a different coalition -- twice managed to avoid EU censures over its spending plans, despite being in near-constant conflict both with Brussels and internally.
Conte’s new cabinet “unanimously” approved all the measures in the draft budget for 2020, respecting deadlines, and giving it a “very clear profile to support growth,” Finance Minister Roberto Gualtieri said in an interview with Il Sole 24 Ore on Thursday.
The economic outlook for the country is far from rosy, but the EU’s focus on Brexit and optimism over new European Central Bank stimulus could effectively mean Italy gets a pass.
The EU’s initial assessment of Italy’s budget is scheduled next month. Fiscal plans are already are being closely monitored given Italy’s huge debt mountain.
The country’s debt rose almost to the highest level on record in the second quarter of the year based on Bloomberg calculations from Bank of Italy data. New data published Wednesday by statistics office Istat showed that industrial orders fell 10% in August, the biggest decline since October 2012. Growth is set to stagnate this year and keep underperforming euro-area peers in 2020.
Italy’s parliament must approve the budget by the end of the year.
--With assistance from John Ainger.
To contact the reporters on this story: Chiara Albanese in Rome at calbanese10@bloomberg.net;Alessandro Speciale in Rome at aspeciale@bloomberg.net
To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Jerrold Colten, Dan Liefgreen
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