Italy’s 2019 budget: a plan that poses many questions

Following lengthy discussions, the Italian government has agreed on the first key points for the 2019 budget. The deficit is expected to be set at 2.4 percent of GDP. This represents an 0.8 percentage point increase in new borrowing over the previously planned debt ratio for 2018. There is even more: Italy wants to maintain this ratio for 2020 and 2021. However, the absence of further important framework data, such as assumptions on growth, inflation or the level of indebtedness, does not allow for an accurate classification. Not only are the concerns about the financial sustainability of the public finances generally unchanged; they were made much worse again recently. This is evident in the financial markets’ reaction to the budget announcement.

It was announced that some EUR 10 bn is being earmarked in the budget for a first step towards achieving the basic income demanded by the 5-Star Movement’s for the 6.5 million Italians living below the poverty line. The Lega can claim tax relief for the self-employed. In our opinion, this can be seen as the first steps in reforming the Italian tax system towards a flat tax rate. The so-called Fornero reform will also be scrapped, so that employees can once again take earlier retirement.

However, Italy’s real problems lie elsewhere. The country has already been dealing for years with a multitude of issues comprising low economic production, a comparatively slow and inefficient public administrative and judicial structure, a high level of corruption and an extensive shadow economy. A purely expansionary fiscal programme alone will not help here. Although this gives economic growth a short-term boost, it is likely to remain weak by EMU standards.

It must at least be stated that with the budget plan, the criteria on new borrowing is not tearing up the Maastricht agreement of three percent. The widening of the deficit is however diametrically opposite to a planned reduction of the high level of debt of more than 130 percent of GDP. Let us recap: the actual target level for government debt is 60 percent and the budget plan as it stands will certainly not lower the debt ratio. One of Italy’s basic problems therefore remains. This not only represents a heavy burden to be repaid by the eurozone’s third-largest economy but which must be shouldered by the entire currency union as well.

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