Rome lets it be known

After weeks of discussions, the Italian cabinet has finally managed to cobble together a budget accord. This budget plan was submitted to the European Commission just before the deadline elapsed. In this draft budget, the government in Rome reaffirms the already known new-borrowing parameters – 2.4% of GDP in 2019, 2.1% in 2020 and 1.8% in 2021. The Italian Finance Ministry puts the revenue shortfall deriving from the neutralisation of the planned hike in the value added tax (IVA) at 0.68% of GDP. The lowering of the retirement age and the citizen’s income will each burden the expenditure side by 0.37% of GDP. On the basis of the assumptions underlying the draft budget, these three items would cost EUR 25.9 billion in absolute terms.

Admittedly, the aggregate volume of Rome’s fiscal plans is roughly in line with the figures already known; however, there are deviations at the level of individual items. The macroeconomic projections on which the draft budget is predicated would appear to be decidedly optimistic: Rome’s forecasts for the sum of real GDP growth and the GDP deflator are so high that nominal GDP growth is projected to exceed 3% continuously from 2019 to 2021 – an extremely high growth path by historical standards. What is more, some of the measures supposed to offset higher expenditure prove to be extremely vague. By way of illustration, efficiency gains in the administrative sphere are meant to plug gaps in the budget. At the end of the day, it cannot be ruled out that the already high projected deficit-to-GDP ratio for 2019 will turn out to be even higher.

However, there is still a long way to go before the Italian budget law is finally passed, not least because Rome will have to convince Brussels about its budgetary plans. The ball is in the court of the European Commission, which now has two weeks’ time to check whether the draft budget is compliant with EU rules and, in the event of a negative verdict, to reject it. The Italian administration would subsequently have the choice between submitting a revised draft within three weeks and heading further down the path of confrontation – an extreme scenario would involve the European Commission initiating an excessive-deficit procedure. Even though Brussels, as is well known, has a number of misgivings about Italy’s fiscal plans and Rome is creating the impression that it is determined not to climb down, both sides will probably ultimately wish to avoid an escalation in the standoff.


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