Italy has a public debt of around 132 percent of gross domestic product (GDP), the highest in the EU behind Greece, and concerns have been raised surrounding proposed plans for increased government borrowing and spending.
Deputy Prime Ministers Matteo Salvini and Luigi Di Maio have pushed for an increase in the budget deficit in order to fund social welfare projects and tax cuts.
Government sources have indicated that Mr Di Maio and Mr Salvini are pushing for a deficit of around two to 2.5 percent, significantly higher than the current 0.8 percent target.
However, Italy’s Finance Minister Giovanni Tria, a former economics professor with no party affiliation, is reportedly set on stopping the country’s deficit from exceeding 1.6 percent of GDP, according to Corriere della Sera newspaper.
There is still a sizeable probability that the Italian government decides to put aside fiscal discipline by implementing an expansionary policy
Lorenzo Codogno, former chief economist and director general at the Italian Treasury Department, has raised hopes that Italy will present a draft version of its 2019 budget to the European Commission for approval, which is respectful of the EU’s regulations that budget deficits do not exceed three percent of GDP.
He said: “Eventually, after months of conflicting and in some cases alarming statements, it seems that the government is moving towards presenting a Budget that is respectful of European rules.
“By stretching the rules to the limit, the estimated minimum structural adjustment for Italy to be considered ‘broadly compliant’ is 0.1pp of GDP, which would bring the nominal deficit to 1.5% in 2019.
“Recent statements out of Rome seem to suggest this is the most likely outcome.
Luigi Di Maio has pushed for an increase in Italy’s budget deficit in order to fund welfare plans (Image: GETTY)
Matteo Salvini is seeking to cut corporate and income tax (Image: GETTY)
“What counts in the upcoming all-important budgetary decision, more than a few decimals up or down in fiscal targets, is the signal on whether Italy wants to play by the rules and maintain long-term fiscal sustainability.”
Reports nevertheless indicate that Italy would require 10billion euros in additional revenues or reduced spending to hit the 1.6 percent target.
Mr Di Maio, leader of the Five Star Movement, has vowed to “put away all the dead wood” from Italy’s budget in order to free up resources for new initiatives.
The Five Star Movement’s plans include a basic income of 780 euros per month for the poor, while far-right Lega’s initiatives include cutting corporate and income tax.
Luigi Di Maio has vowed to ‘put away all the dead wood’ in Italy’s budget (Image: GETTY)
Mr Codogno warned that if the ruling coalition implements all of its campaign promises, Italy will likely fail to hit the 1.6 percent deficit target, and will instead maintain debt at around three percent of GDP.
He said: “There is still a sizeable probability that the Italian government decides to put aside fiscal discipline by implementing an expansionary policy, while still maintaining the deficit close to the three percent threshold.
“It would be the outcome if the government does not manage to find proper financing for the required adjustment and wants to deliver a more substantial part of the electoral promises delivered.”
Mr Codogno warned that Italy faces a binary outcome; either the government will try to deliver a budget which is considered compliant, or it will give up and move towards the three percent deficit model.
While he believed the Italian government will follow the former model, he said the risk of the coalition pursuing an “expansionary model” remains high.
The Italian government will publish its deficit and debt targets by September 27, before sending their draft budgetary plan to Brussels by October 15, with the actual budget being published by October 20.
The European Commission will then have until the end of November to issue a non-binding opinion on the budget, with a final approval expected by the end of the year.
Mr Codogno described the budget as a “moment of truth” and stated the budgetary model chosen will be the “difference between a virtuous cycle of fiscal consolidation and a spiralling self-fulfilling disaster”.
The Italian government will publish its deficit and debt targets by September 27 (Image: GETTY)
The European Commission had until the end of November to issue a non-binding opinion on the budget (Image: GETTY)
The former official concluded: “I tend to believe that eventually Italy will give way to the Commission’s requests and accept a 1.6 percent target.
“However the risk is still high that the government at some point decides to blow up the negotiation and go for fiscal expansion.
“The risk of a self-fulfilling prophecy by which the spiralling borrowing costs raise sustainability issues, and thus trigger a further financial market reaction, should not be underestimated.”
If Italy does pursue an “expansionary model”, the European Commission may issue a negative opinion on the budget and open a procedure for excessive debt, forcing the government to change its objectives.